Government May Revaluate Bank Recap After PNB Fraud

The government may re-evaluate its bank recapitalisation plan after the Rs 12,700-crore fraud at Punjab National Bank and the possibility of more public-sector lenders coming under the central bank's prompt corrective action, a senior government official told BloombergQuint requesting anonymity.

Of the earmarked Rs 2.11-lakh crore plan, banks are expected to raise Rs 58,000 crore from the market. That would be difficult after the fraud at the second-largest public-sector lender and if more banks come under the PCA, the first official quoted above said. PCA imposes restrictions on a bank's lending activity if it breaches thresholds for bad loans, weak capital levels and low return on assets.

The government planned to infuse about Rs 1.2 lakh crore in the next year financial year starting April. That will be assessed again and no estimate has been made on the additional capital as of now, he said. Since the ongoing financial year is almost over and an infusion of about Rs 88,139 crore has been announced, no changes would be made for year ending March 31, the official said.

Shares of PNB have fallen more than 31 percent since it reported that jeweller Nirav Modi and his firms obtained loans overseas on fraudulent guarantees issued through the bank's system. The Nifty PSU Bank Index has since declined more than 8 percent. India's public-sector banks, according to RBI data, accounted for nearly 90 percent of more than Rs 8 lakh crore bad loans as of September. Already, 11 of India's 21 listed government-owned banks are under PCA.

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Five more—Andhra Bank, Canara Bank, Union Bank of India, Punjab National Bank and Punjab and Sind Bank—are expected to be brought under the prompt corrective action framework, according to ratings agency ICRA. Such banks face restrictions on lending and expansion.

The government had in October last year announced the Rs 2.11-lakh crore fund infusion over two years to boost capital of the lenders. A bulk of this, or Rs 1.35 lakh crore, would be raised through recapitalisation bonds. The rest would be met through budgetary allocation or market borrowing.

The actual recapitalisation required would depend on the growth banks are targeting and how much they plan to raise from the market or through selling non-core assets, Kartik Srinivasan, senior vice-president at ICRA, told BloombergQuint. There could be some issuances by a few banks to raise money from the market, but not all public-sector lenders would be able to do that, he said.

The government will take a relook at the recapitalisation plan in three months to decide if it needs any change in three months, said another senior Finance Ministry official. He said it was too early to comment further. A third official pointed out that market conditions in the next financial year could turn more conducive for banks to raise funds, indicating that any change in plan would need to factor that in.

The Economic Survey 2017-18 tabled last month had also pointed out that expeditious resolution of stressed assets through the Insolvency and Bankruptcy Code may require the government to provide more resources to state-run lenders, especially if the haircuts required are greater than previously expected, the ongoing asset quality recognition uncovers more stressed assets, and if new accounting standards, or Ind-AS, are implemented.

Some clarity on capital requirements of public sector banks could come in about a month's time as they get a better idea on the recoveries and haircuts that lenders will have to take from the PNB fraud and the insolvency cases, said Srinivasan.

Also Read: PNB Fraud: New RBI Committee To Look Into Divergences, Frauds, Bank Audits