Small banks may not find much comfort in FM's capital bonanza

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Beena ParmarMoneycontrol BureauFinance Minister Arun Jaitley announced an allocation of Rs 10,000 crore for ailing state banks in his Budget speech yesterday. While nimble, bigger lenders will have no complaints, smaller public sectors may not feel the same way. For one thing, this capital outlay is much lower than the Rs 25,000 crore allocation in FY17. The allocation is a part of the Rs 70,000 crore recapitalisation package that the government has undertaken to provide for a 4-year period till FY19.While the FM has promised more funds, if a need arises, smaller banks are still likely to struggle. Corp Geeta Chugh of S&P Global Ratings said, “The capital allocation is insufficient and we estimate a further requirement of Rs 2.5 lakh crore to meet the Basel III norms…Smaller public sector banks may struggle to grow as we have seen them de-grow and they may become takeover targets… Next (financial) year weaker public sector banks will see a lot of pressure and we may see a lot of consolidation.”Chugh further said that private sector banks and bigger public sector banks are better placed to meet Basel III capital norms, which requires banks to have a certain percentage of capital as buffer.She expects banks to raise more funds through additional tier 1 (AT1) bonds.
Additional Tier-1 bonds or AT1 bonds are debt instruments which have equity-like features issued by banks to raise funds but have to pay a higher interest. They don't have a maturity date.

“There is a challenge for the other public sector banks to meet alternate capital needs…Though banks can draw comfort from the mention by the Finance Minister on additional capital support if needed, they will be forced to tap the markets for further fund raising,” Chugh added.
As on September 30, 2016, six public sector banks -- UCO Bank, Allahabad Bank, Central Bank of India, Corporation Bank, State Bank of Travancore and State Bank of Mysore -- reported Tier 1 capital of less than 8.25 percent, the regulatory minimum by March 2017.

Furthermore, according to ICRA rating agency, the overall capitalisation levels of most of the public sector banks remain moderate to weak, given that they need to attain the regulatory minimum Tier 1 (Basel III) requirement of 9.5 percent by March 2019.A public sector bank official said, “Of course, we will require more capital and as per the assurance, the government will help us raise more funds directly or indirectly. Smaller banks will have to continue to focus on risk-weighted assets and build a good credit profile of clients and rebalancing their retail and corporate portfolio.”Last month, Alka Anbarasu, Vice President and Senior Analyst at Moody's Investor Service said that asset quality will weigh heavily on most public sector banks. Non-performing loans (NPLs) and standard restructured loans will still rise during the horizon of our outlook, she said.