Weak public sector banks gain majority share from government
New Delhi:
Weak public sector lenders, such as the Central Bank of India and Punjab & Sind Bank, are getting the lion’s share of the 15,000 rupees earmarked for capital injection into state-owned banks for the current fiscal year.
This will help these public sector banks (PSBs) to comply with legal requirements.
The capital injection of Rs 15,000 crore would mainly go to banks that had received funds through non-interest-bearing bonds in the previous year as the RBI had expressed some concerns about the fair valuation of these instruments, sources said.
According to the RBI, the net present value of last year’s infusion via zero-coupon bonds is much lower than par since they were issued at a discount, the sources added.
These 10-15 year special securities are non-interest bearing and are valued at par. Such bonds are usually non-interest bearing and are issued at a large discount to face value. The effective Tier 1 capital levels for the banks may therefore be lower than the legal requirement.
According to India Ratings and Research, the real valuation of the equity capital injected by the government into five PSBs last year through zero-coupon bonds could lower the banks’ effective Tier 1 capital level by 50-175 basis points than reported.
Earlier this month, Punjab & Sind Bank received board approval to raise equity capital worth Rs 4,600 crore by issuing preferred shares to the government. This would help the bank bring capital to the required level and avoid falling under the prompt corrective action (PCA) framework.
Likewise, sources said the decision on the quantum for other banks would be made in March and funds would be administered thereafter.
In the budget, the government has reduced the capital injection target to Rs 15,000 crore from Rs 20,000 crore previously estimated for 2021-22.
The first capital injection through non-interest bearing bonds took place in Punjab & Sind Bank in Q3 2020-21. It was followed by Rs 14,500 crore across four lenders – Bank of India, Indian Overseas Bank, Central Bank of India and UCO Bank in March 2021.
Central Bank of India received Rs 4,800 crore, UCO Bank Rs 2,600 crore, Bank of India Rs 3,000 crore and Indian Overseas Bank Rs 4,100 crore.
