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Recapitalisation by Govt. is credit positive but PSU banks need to improve overall governance: S&P

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(G.N.S) Dt. 25

Mumbai

The latest infusion of capital in the state-run banks by the government is credit positive but lenders also need to improve efficiency and put better risk management practices, says a report. On Wednesday, the government announced that it will infuse Rs 88,139 crore capital in 20 public sector banks before 31 March to boost lending and revive growth. A report by S&P Global said the move will provide banks with much-needed capital to begin cleaning up their balance sheets aggressively.

The report said it believes the capital infusions alone won’t go far enough. “Beyond solving the immediate balance-sheet problems, PSBs require significant improvement in risk management practices, efficiency gains, and better overall governance to boost the health of the sector. Nevertheless, it is a good beginning,” the rating agency’s credit analyst Deepali Seth-Chhabria said in the report.

The capital infusion is part of the massive Rs 2.11 lakh crore bank recapitalisation plan announced by the government in October last year. It is spread over two fiscal, 2017-18 and 2018-19. The finance ministry will raise Rs 80,000 crore through recapitalisation bonds and provide another Rs 8,139 crore from the budget to recapitalise the banks. In the current round, IDBI Bank got the biggest capital injection at Rs 10,610 crore. The bank has a huge amount of bad debt and dipped into its capital conservation buffer (CCB) last year.

“This injection should help IDBI Bank to meet its regulatory requirement and clean up its balance sheet significantly. It may also be credit positive for the bank, depending on how it uses the capital,” the rating agency’s credit analyst Nikita Anand said. This capital infusion is a whopping 47 per cent of the bank’s tier 1 capital as of September 30, 2017. Indian Bank did not receive any capital in this round because of its better performance. “We view the bank’s capitalisation as adequate and better than that of most of its peers,” the rating agency said.

The capital injected into large banks such as SBI and Bank of Baroda, which already have a relatively better capital position, should help them to accelerate growth. The government also announced a reform agenda with this capital infusion plan. It said the recapitalisation would be dependent on performance and reforms.

Banks will have to adopt the differentiated business strategy and exit from non-core businesses and focus on their core competencies, it said. The rating agency had earlier estimated the capital requirements of public sector banks at Rs 1.7-2.1 trillion, to meet Basel III requirements through 2019 and to make provisions for loans to stressed projects.

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