Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Public Sector Bank Bailouts: IOB and Central Bank Benefit, Allahabad Bank Not So Much


After much waiting finally the first tranche of public sector bank recapitalization is out. The Government has infused Rs 22915 Crs in 13 PSU Banks. Government has currently releasing 75% of budget amount (25,000 cr.) for PSU Banks, the rest will be released based on the performance of the banks mainly linked to efficiency and growth in credit and deposits. The capital infusion is part of the ‘Indradhanush’ plan under which state-run lenders will get Rs 70,000 crore over four years. 

The basic idea of capital infusion in the PSU banks was to add capital in order to get better capital ratios, because the banks’ NPAs had reduced their capital. To read our previous post on Bank NPAs, Click here.

Look now at the capital additions, or “bailouts”, with respect to bank bad assets:

PSU Bank Recapitalisation FY17 Overview

Click To Enlarge

Note: The NPAs and Gross Loans considered are as of Q4 FY16.

SBI saw the highest capital infusion with Rs 7575 Crs and Allahabad Bank the least with Rs 44 Crs.

But we have to look at things differently. The idea is to look at this capital and see how much of a loss each bank can take from their massive NPA list. 

Banks have provisions from their Gross NPA, and if you reduce that you get the net NPA. Essentially provisions cover some of the losses; but as capital is low their capital adequacy ratios continue to suffer. (CAR = Capital / Risk adjusted Assets) 

Look at the first entry. If just 0.43% of the Net NPA of Allahabad bank is converted to losses, then the capital infused is wiped out. (If they have to record even 44 cr. of losses out of the Net NPA of 10,293 cr. the new capital is gone. 

But for the banks like IOB, United Bank of India and Central Bank will sigh a breather as the capital infused to Net NPA Percentage is higher than 13%. Which means more than 13% of the Net NPA should convert to losses to erode away the benefits of the capital infusion. The overall capital infusion as a percentage of Net NPA stands at 9.06%.

Our View:

The capital infusion has been very meagre (0.50%) compared to the gross advances outstanding for the PSU Banks. This is as budgeted, but the horrible results of banks in the March quarter will require substantially higher allocation. Some banks benefit more than others, and IOB, Central Bank and United Bank get a better deal in terms of covering for their bad assets. However, these banks are likely to have a lot more skeletons in their closets, and after this capital allocation, it’s likely that further bad news will come out. In other words, it’s just a temporary bailout. 


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial