PSU bank capitalisation and a perfect lesson in burning capital

Where has all the money poured by the government into its weakest banks gone? If the stock market’s collective wisdom is used as a fair measure, it looks like the majority of it is being seen as money down the drain.

The government has infused about 1.9 trillion into banks it owns in the past two years, of which nearly two-thirds have gone to the weakest lot that is

under quarantine. Public sector banks (PSU banks) under the Reserve Bank of India’s Prompt Corrective Action (PCA) framework have received about 1.25 trillion in recapitalization, while their healthier peers got far less. The PCA framework is a scheme wherein RBI quarantines weak banks so that their balance sheets can heal.

But since April 2017, the combined market capitalization of the 11 PCA banks has increased by only 28,600 crores. Of course, quite a few of these banks are now out of the PCA framework, thanks to the capital infusion, but the above chart refers to all 11 banks.

While stocks of some of these PCA banks have risen on the days the exact amount of bank recapitalization was revealed by the government, gains have hardly lasted.

For some companies, burning capital may be a sign of rapid growth, but for others, it is a sign of ill health. It is obvious that much of the funds have gone towards provisioning. Meanwhile, depressed income growth continues to keep these banks from making reasonable profits.

To be sure, being under the RBI PCA framework has a direct hit on income considering that there are a number of restrictions on banks. But even though five of the 11 banks that were placed under PCA have exited, investors don’t seem as enthused about future prospects.

Analysts say that it would take at least a couple of more years for these banks to start returning value to their promoter for the capital they have got.

That said, their wealthier counterparts haven’t fared well at all. The 10 PSU banks outside the PCA framework saw their market capitalization erode by 6,000 crores in the fiscal year 2019 so far.

It should be noted that these banks have a healthier income growth than their PCA peers, but the overhang of stressed assets continues to wipe out a large part of their earnings. But in their case, the capital infusion, compared with those under PCA, is far less.

As pointed out earlier, while the government had earlier said PSU bank recapitalization would benefit banks with better financial prospects, it looks like it has ended up doing just the opposite.

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