Will Capital Infusion Help PSU Banks In India?

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    It has been one of the worst quarters for PSU banks in India. Almost all of them have reported massive losses for the quarter ending March 31, 2018, led by huge losses in Punjab National Bank.

    Will Capital Infusion Help PSU Banks In India?
    In fact, this nationalized bank reported the highest ever losses in the history of any bank in India by recording a loss of Rs 13.417 crores for the quarter ending March 31, 2018.

    Union Bank of India reported a quarterly loss of Rs 2,583 crores, Central Bank loss was placed at Rs 2,113 crores, Allahabad Bank Quarterly loss was at Rs 3,509 crores, Canara Bank at Rs 4,860 crores and so on. Oriental Bank, Dena Bank, UCO Bank were the other banks that reported losses.

    Business is shrinking

    The losses can be attributed to many factors - among these include the massive gross non performing assets, which in most cases range between 10 and 24 per cent. Apart from this a rise in sovereign bonds, led to more losses for these banks. It is likely that this would continue given that bond yields have been constantly rising. Apart from this banks are also capital starved to expand their balance sheet.

    Government owned banks are also fast loosing business to their private sector peers. While deposits have managed to remain the same, a recent study of select government owned banks, shows that incremental share in news business has shrank to 10 per cent.

    Private sector peers have turned more aggressive and analysts fear that the deposits base would also erode at these banks with the passage of time.

    Is capital infusion the solution?

    If taxpayers money is thrown into the government banks to recapitalize them, the worries are that it would be throwing "good money after bad". The new capital infusion would provide for settling against toxic assets, barely allowing these banks to expand.

    At the moment, pumping money into these banks without restructuring would be wasteful. The first step would be to completely restructure these banks and allow them complete autonomy. We all know, they have to fulfill priority lending and at times, there is intervention from the government as well. Clearly, this is not going to work.

    A complete rejig of personnel would have to be undertaken. The entire attitude would need to change and change fast, if we have to restore the health of the PSU banks. Of course, one of the big decisions that the Narendra Modi government can take is to privatize these banks. That is easier said then done though.

    The problem right now is simple - if you infuse fresh capital, the good money would be used to pay the toxic assets, leaving nothing to expand.

    All in all it's a very bad situation. If the present trend continues, of such massive losses, it's going to be disastrous in the next two years. In fact, we have often heard commentaries stating that the worst seems over for banks. However, that just does not seem to be happening. Every quarter we see non performing assets getting worse and so does profitability. There is no light at the end of the tunnel currently.

    GoodReturns.in

    Read more about: union bank central bank
    Story first published: Saturday, May 19, 2018, 7:14 [IST]
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