The government will likely infuse capital of around Rs 30,000-40,000 crore into public-sector banks (PSBs) in the current fiscal and another Rs 3,000-5,000 crore into three general insurance companies, banking sources told FE.
With uncertainties hovering around the amount of surplus transfer from the Reserve Bank of India to the government, the capital infusion into PSBs in FY20 will most likely be through recap bonds again. These securities remain off-Budget items, although the interest on them is paid from the Budget. Nevertheless, the entire amount of bonds will find mention in the upcoming Budget. The February interim Budget did not provide for capital infusion for either PSBs or state-run insurers.
The issue of shoring up the capital base of insurers has gained renewed focus after Insurance Regulatory and Development Authority of India (Irdai) chairman Subhash Khuntia flagged low solvency ratio of some of them and stressed the need to have well-capitalised insurers at last week's FSDC meeting chaired by finance minister Nirmala Sitharaman.
Earlier this year, the department of financial services (DFS) had sought Rs 4,000 crore for infusion into three general insurers - National, Oriental and United - as at least two of them (barring Oriental) had been struggling to maintain the solvency ratio requirement of 1.5. Although the worst seems to be over for PSBs, a section of the government believes that capital infusion is required to bolster their ability to lend and support economic growth. Also, given its plan for consolidation, the government wants to ensure that the larger entity created from a merger of banks remains adequately capitalised.
A final call on the exact amount of capital infusion into PSBs and insurers, however, will be taken by the department of economic affairs, depending on the availability of resources, said the sources.
PSBs with decent bad loans ratio will be offered growth capital, while those under the central bank’s corrective regime (Allahabad Bank, United Bank of India, Corporation Bank, UCO Bank, Central Bank of India and Indian Overseas Bank) could get just about enough to meet regulatory requirements, said the sources. The government had infused a record Rs 1.06 lakh crore into state-run banks in FY19, against `88,139 crore a year earlier.
According to the latest Crisil report, PSBs - which make up for roughly 80% of the bad loans in the banking system - will see their gross NPAs shrinking by as much as 400 bps to 10.6% by March 2020 from 14.6% in March 2018. Separately, the government told Parliament on Tuesday that gross NPAs of state-run banks dropped to `8,06,412 crore as of March 2019 from the peak of Rs 8,95,601 crore in a year earlier, emphasizing the improvement in the PSBs' asset quality.
However, as pointed out by FE earlier this month, while the government infused over Rs 2.5 lakh crore since FY15, the share of PSBs in the market capitalisation of all banks plunged to just 26.04% from 42.93% on May 23, 2014, just before PM Narendra Modi came to power. Had the PSBs retained their share, their market cap would have been higher by almost Rs 4 lakh crore now, which means a notional loss of as much amount. This provides a cue for the new government to introduce reforms in the banking space by privatising sick PSBs instead of pumping in more money into them or asking LIC to bail them out (as in case of IDBI Bank).
As for general insurance companies, an increase in underwriting losses and higher claims have eroded their profitability in recent years, impacting their solvency ratio. While Oriental Insurance’s solvency ratio stood at 1.66 as of March 2018, United India had a solvency margin of 1.54 and National Insurance’s was 1.55. These three insurance companies together accounted for 200 insurance products and a market share of around 35% as of March 2017. Their combined net worth was to the tune of `9,243 crore and employee strength of around 44,000 across 6,000 offices.