Budget may not allocate any fund for bank recapitalization, says rating agency report

The upcoming budget is unlikely to make any provision for recapitalisation of state-owned lenders, as over Rs 3.36 lakh crore has been spent on the banks in the last six years, a domestic rating agency said on Thursday.

The banks will raise capital through internal accruals and fundraising from the market, Icra said in a note, adding that the lenders have the ability to manage.

Courtesy of the over Rs 3.36 lakh crore of fund infusions from the taxpayers, the state-owned banks' stock of net non-performing assets has reduced to 2.8 per cent as of September 2021 from the 8 per cent level of March 2018, the Icra note said.

With high provisions on legacy stressed assets, the earnings outlook for public banks also seems healthy, as we expect most public banks to incrementally remain profitable and generate growth capital requirements internally, it said.

It can be noted that in the past, the bank recapitalisation allocation is one of the most keenly awaited numbers in the annual budget exercise.

The agency said recoveries from legacy NPAs as NARCL (National Asset Reconstruction Company) becomes operational could aid the bottom lines of the banks in the coming years.

It said public banks were also able to roll over their additional tier I bonds that were due for a call option in FY22, reflecting a strong investor appetite for their issuances, which bodes well for their future issuances.

With cleaner balance sheets and an improved earnings outlook, banks can also raise capital from market sources as they have done in recent years.

For the first time in over a decade, we do not expect any capital to be budgeted by the government of India for public banks despite the enhanced regulatory capital requirements, it noted.

The agency also said it expects the budget to have some provision for a permanent refinance window from the RBI, as such entities account for a fourth of the overall lending in the economy.

We expect the Budget to continue with some of the liquidity and guarantee schemes to ensure near-term funding availability for NBFCs (non-infra) and to provide guidance on the medium-term support framework for the sector, which could boost investor confidence and would be key for a sustainable revival, it added.