Finance ministry asks state-run banks to raise capital from markets

The finance ministry has asked state-run banks to further bolster their balance sheets from markets, which will enable them to reduce reliance on the government to shore up their capital adequacy.

At a meeting with top executives of public sector banks (PSBs) on Friday, financial services secretary Sanjay Malhotra expressed optimism that the lenders, having registered good profitability in the first three quarters of FY22, will continue to perform well on relevant metrics in the coming years.

“The underlying idea behind the exhortation is simple. Strong banks, with adequate capital, will be able to lend more and help economic growth. The government’s focus is on credit flow,” a top banker, who attended the meeting, told FE.

The government was forced to infuse over Rs 3.3 trillion between FY16 and FY21 into state-run banks to help them cope with the bad loan crisis. For the current fiscal, however, the government hasn’t budgetted any capital infusion, after no state-run bank recorded loss in the first three quarters of FY22.

Malhotra also impressed on the PSBs to explore more tie-ups among themselves and asked large banks to share their best practices with small lenders and guide them where they need more support and expertise.

The meeting was part of the Manthan 2022 that was held after a gap of three years during which the pandemic battered several sectors of the economy, raising concerns about the asset quality deterioration of lenders once all the relaxations and forbearances granted by the central bank come to an end.

While credit flow has improved in recent months amid prodding by the government, bankers are yet to shun risk aversion considerably.

Non-food bank credit grew 8% in February, compared with 6.6% a year before. However, loans to industry grew at a slower pace of 6.5% even on a favourable base (it had risen just 1% in February 2021).

Improved financials enabled PSBs to raise a record Rs 58,697 crore from the markets FY21, which included an equity capital of Rs 10,543 crore. This was way above `29,573 crore raised by them in FY20. In the first eight months of FY22, PSBs raised as much as Rs 32,567 crore.

Importantly, PSBs recorded a net profit of Rs 48,874 crore in the first three quarters of FY22. This is higher than the profit of Rs 31,820 crore in the entire FY21, which was the highest in five years.

According to the RBI data on domestic operations, state-run banks’ gross bad loans dropped to 8.18% of gross advances by December 2021 from 9.36% as of March 2021. Their capital adequacy was about 14.3% as of June 2021, above the requirement of 10.875%. The financial services secretary also asked the chiefs of PSBs to firm up strategies to ensure long-term profitability and adopt even more customer-centric approach.

The Manthan 2022 was held to brainstorm with the top leadership of PSBs and unlock next-generation reforms while continuing with the so-called EASE (enhanced access and service excellence) initiative, according to a senior official with the Indian Banks’ Association. The first PSB Manthan exercise was held in 2014. The IBA is now spearheading the EASE initiative.

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