The government is unlikely to announce capital infusion for the public sector banks (PSBs) in the upcoming Budget and will rather encourage them to expedite recovery of bad loans and raise funds from the market.
Besides, sources said, banks may also look for divesting or selling their non-core business including insurance joint ventures as part of fund raising exercise during 2020-21.
According to Finance Ministry estimates last year, PSBs will require Rs 1.8 lakh crore additional capital in the next four financial years. Of this, they will have to raise Rs 1.1 lakh crore from the market or via the sale of non-core assets. The ministry of finance earlier indicated that weaker banks will have to sell assets, reduce overheads, shut loss-making domestic and foreign branches and temporarily stop employee benefits, if necessary, in order to independently raise capital to meet the shortage.
Another factor driving the stake sale by banks could be the inability of insurance companies to scale up in proportion to the investments made. Large private bank-led life and general insurers have outpaced others and grabbed a large market share.
“Apart from the top three to four players in the private sector, other insurers have seen a marginal to nil growth. At a time when the banks are already battling a non-performing asset (NPA) war, further investments in insurance are not on top of their mind. Rather, they are looking to monetise these assets,” said sources.
Finance Minister Nirmala Sitharaman is expected to present the second budget of the Modi 2.0 government on 1 February .
According to sources, banks have robust pipeline of recovery from the resolution of both NCLT and non-NCLT cases during this calender year and also headroom for raising capital from the market.
The provision coverage ratio of public sector banks is at a 7-year high of 76.6%.
In some of the non-performing assets, banks have done provisions up to 100 per cent, sources said, adding that recovery from those account will straightaway form part of the bottomline. Share price of some of the banks are firming up which provide them opportunity to dilute government holding, sources said.
Country's largest lender State Bank of India (SBI) has already initiated the process of diluting its stake in its subsidiaries SBI Cards and Payment Services Ltd and UTI Mutual Fund.
It is looking to sell 50 lakh shares representing 1.01% stake in the National Stock Exchange (NSE).
Similar exercise is being undertaken by other state-owned lenders as well in an effort to raise capital. In addition, the government has already front loaded ₹68,855 crore, out of ₹70,000 crore earmarked for capital infusion for the current fiscal, to take care of the mega-merger plan announced in August, 2019.
Among all four anchor banks — Punjab National Bank was given ₹16,091 crore, Union Bank of India ₹11,768 crore, Canara Bank ₹6,571 crore and Indian Bank ₹2,534 crore.
Merging entities like Allahabad Bank was provided ₹2,153 crore, United Bank of India 1,666 crore and Andhra Bank ₹200 crore.
Besides, Bank of Baroda got a capital infusion of ₹7,000 crore, Indian Overseas Bank ₹4,360 crore, UCO Bank ₹2142 crore, Punjab & Sind Bank 787 crore and Central Bank of India ₹3,353 crore.
LIC-controlled IDBI Bank too received additional capital of ₹4,557 crore through the first supplementary demands for grants approved by Parliament last month.
With the deadline of March 31 to complete other regulatory requirements, the merged entity will come into existence beginning next fiscal.
Alternative Mechanism of Government of India gave in principle approval for merger of United Bank of India and Oriental Bank of Commerce with Punjab National Bank, making the proposed entity the second largest public sector bank (PSB).
Syndicate Bank will be merged with Canara Bank, while Allahabad Bank will be amalgamated with Indian Bank.
Similarly, Andhra Bank and Corporation Bank will be consolidated with Union Bank of India.The government remains committed to maintain financial health of public sector banks and it will provide capital in case if the need arises in the future, sources added.