Indian banks may get a reprieve of about Rs 13,400 crore in capital exemption, as announced by the Reserve Bank of India board on Monday. The biggest beneficiary of this would be the government, because the RBI decision would lessen the burden on it to bridge a capital shortage at several state-run banks.
Investment bank Jefferies estimates the implied reduction in capital infusion requirement following the central bank announcement at around Rs 13,380 crore, considering the common equity tier-1 ratios and riskweighted assets of 10 banks in the quarter ended September.
The RBI pushed back the deadline by a year to March 2020 for banks to create a capital conservation buffer of 2.5% instead of the current 1.875%. The CET 1 (common equity tier) requirement as of March 2019 therefore would continue to be 7.375%, providing some buffer time for the 10 banks which fall under minimum requirement of the equity capital ratio to have a reserve of freed up capital to infuse into the system.
At 7.375% common equity tier 1 requirement, the 10 public sector banks including Oriental Bank of Commerce, Indian Overseas Bank, Andhra Bank, Central Bank of India, Punjab National Bank, United Bank, Uco Bank and IDBI Bank will require `21,420 crore of additional capital, compared with Rs 34,800 crore at 8%.
The marathon nine-hour RBI board meeting on November 19, following the apex bank’s nearly month-long rift with the central government, made important decisions on the ongoing liquidity crunch and the MSME sector slowdown.
“While this (decision on bank capital) would lessen the government burden, we believe this (capital addition) is minuscule and would only meet the minimum requirements. Additional capital infusion would be required should the government wants the banks to push balance sheet growth,” Jefferies said in a report released on Tuesday. Another major discussion point between the RBI and the government going into the meeting was the slowdown of the micro, small and medium enterprises sector, affected by demonetisation and the implementation of GST.
“To that extent, any restructuring scheme should alleviate some stress points, although we are not really sure if restructuring without either economic loss absorbed by lenders or a cyclical growth uptick will result in a sustainable solution,” the report said.
The asset quality for the MSME segment has held up well despite the challenges thrown at them. Non-performing assets for the MSME segment has increased 1.2 percentage point to 11.5% in two years, compared with that for large companies going up 7.5 percentage points to 19.5% and mid-corporate by 2 percentage points to 16.6%.
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