Bank Recapitalization Needs to STOP

Bank Recapitalization – Refers to improving/restructuring the debt and equity mix of banks, with the aim of making capital structure more stable.

In the context of Public Sector Banks (PSBs), Recapitalization can refers to poor financial decisions of the government in spending money on something that they have already spent money on in an attempt to make it succeed, even though it is unlikely.

Recapitalization is a prompt response to infuse funds in cash-strapped public sector banks. Over the years, Government has infused large sum of money in these PSBs, but the situation has always gone from bad to worse.

Financial Year

Recapitalization Amount (In Rs. Cr.)

2011-2012

12,000

2012-2013

12,517

2013-2014

14,000

2014-2015

6,990

2015-2016

25,000

2016-2017

25,000

2017-2018

2,11,000

2018-2019

1,60,000

Instead of helping PSBs, the bank recapitalization scheme has encouraged these banks to engage in riskier lending knowing the government would bail them out if those loans failed.

With this strategy in mind, PSBs keep incurring huge losses; maintain poor balance sheet position and high non-performing and stressed assets. It should be noted that the capital infusion by the government in these PSBs may ensure banks’ solvency but may not necessarily ensure stability and growth in the absence of some structural reforms.

Current Public Sector Bank Performance

PUBLIC SECTOR BANKS

Name

Last Price (Rs.)

Market Cap. (In Rs. Cr.)

P/E

(TTM Basis)

P/B

GNPAs

NPAs

SBI

284.85

254,217.56

26.82

1.18

7.53%

3.07%

Bank of Baroda

99.55

38,294.17

62.22

0.76

10.28%

3.95%

PNB

64.8

29,834.22

0.71

16.49%

7.17%

Bank of India

68.25

22,365.00

0.51

16.50%

5.79%

IDBI Bank

28.45

22,009.76

0.69

29.12%

8.02%

Canara Bank

205.50

15,479.18

39.22

0.49

8.77%

5.35%

Allahabad Bank

33.75

12,560.80

1.14

17.43%

5.71%

UCO Bank

15

11,043.30

0.83

24.85%

8.98%

Union Bank

59.7

10,525.21

0.43

15.18%

7.23%

Corporation Bk

17.25

10,339.97

0.66

15.44%

5.69%

IOB

10.2

9,324.48

0.57

22.53%

11.04%

Oriental Bank

67.8

9,290.02

16.58

0.53

12.56%

5.91%

Syndicate Bank

32.3

8,668.43

0.52

11.76%

5.06%

Indian Bank

168.2

8,267.61

17.30

0.50

22.53%

11.04%

Central Bank

19.6

8,086.80

0.42

19.93%

7.98%

United Bank

9.7

7,205.08

0.68

15.89%

8.19%

Bank of Mah

12.05

7,018.05

0.78

17.90%

5.98%

Andhra Bank

19.6

5,849.60

0.44

16.44%

5.67%

Punjab & Sind

20.65

1,243.25

0.22

12.88%

7.77%

Interesting Fact – the aggregate profit of all PSBs Rs. 4,133 Cr. is well below that of a single private player HDFC Bank’s Rs 5,568.16 Cr.

Instead of just pouring the taxpayer money into a flawed system, it would be better to implement measures which can improve credit delivery discipline, and raise the level of skill set by appointing the right kind of people on the board.

Need to Divest Stake 

Year after year, the government has been issuing shares in PSBs, in lieu of the capital it has been infusing. This has led to a sharp rise in its holdings in these banks. Much of the sharp increase in government holdings has happened in the last two years. In some of the PSBs, the government is holding 90% and over stake, this may restrict capital infusion in near future.

Over the last 5 years, some PSBs have received more capital more than their current market cap (as on 11th Sept, 2019).

PUBLIC SECTOR BANKS

 

Govt. Holding %

 

 

Name

Mar-15

Mar-19

Capital Infusion over 5 Years

(In Rs. Cr.)

Market Cap. (In Rs. Cr.)

SBI

58.6

57.92

22,844

254,217.56

Bank of Baroda

57.53

63.26

13,463

38,294.17

PNB

59.86

75.41

24,342

29,834.22

Bank of India

64.43

89.1

30,399

22,365.00

Canara Bank

69.91

70.62

7,127

15,479.18

Allahabad Bank

60.83

85.82

14,984

12,560.80

UCO Bank

72.83

93.29

15,773

11,043.30

Union Bank

60.47

74.27

10,257

10,525.21

Corporation Bk

63.33

93.5

15,193

10,339.97

IOB

73.8

92.52

15,317

9,324.48

Oriental Bank

59.13

87.58

10,557

9,290.02

Syndicate Bank

69.24

84.66

8,778

8,668.43

Indian Bank

82.1

81.49

280

8,267.61

Central Bank

81.46

91.2

13,682

8,086.80

United Bank

82

96.83

9,138

7,205.08

Bank of Mah

79.8

87.74

8,570

7,018.05

Andhra Bank

61.02

90.85

8,763

5,849.60

Punjab & Sind

79.62

85.56

785

1,243.25

In current scenario, it will make sense if India’s banking system is allowed to operate with minimal government intervention. Government should stop recapitalization and should make efforts in privatizing India’s banking system which can prove to be an essential reform to increase the operational efficiency of struggling PSBs.

A suggestion which has been made over and over by many.

Also Read: PSU Bank Privatization: Do It While You Can