Public sector banks (PSBs) are planning on creating capital buffers to absorb likely NPSs at the end of the 6 month loan moratorium. Private sector banks had earlier decided to raise capitals and public sector banks seem to following them by doing the same. As of now, the odds of PSBs getting adequate capital from the financially strained government seem very less. Reserve Bank of India (RBI) being the bank regulator, has already asked commercial banks to raise capital buffers in view of Covid-19 pandemic related issues.

The State Bank of India (SBI), which happens to be the largest bank in the country, had indicated earlier that it had no plans to raise capital has now come up with a proposal to raise a total of Rs. 25,000 crore worth capital. Banks such as IBDI, Canara Bank and Central Bank of India have devised plans to raise Rs. 11,000 crores, Rs. 5,000 crores and Rs. 5,000 crores respectively. Whereas banks such as Punjab National Bank (PNB), which have sufficient capital with an adequate capital ratio plan on raising capital at the end of the year.

Unlike private sector banks, PSBs will not be successful at raising capital at a good price of equity and at a good rate of debt capital from the market as the valuation of PSBs are very low in the stock market as of now as compared to private sector banks. Private Sector Banks have 3-4 times the valuation of PSBs and thus it will be difficult for PSBs to raise capital like the private sector did. Most PSBs are dependent on the Government for providing capital, but because the Government itself is struggling to raise moneys, it may not be as helpful to the PSBs as always. The Government has managed to create a capital of Rs. 3.1 lakh crore in the last 5 years for the PSBs. The Government in recent past has used recapitalization bond to raise capital like it did in 2017 to raise 2.11 lakh crore capital.

However, the RBI Governor had said that recapitalization plan was a necessary for PSBs and private sector banks in the current situation and the Government must act quickly to implement the same. The capital adequacy ratio might be sufficiently comforting as of now; it won’t be when the 6 month loan moratorium comes to an end. Currently, 40% of banks’ loan is under moratorium. And since the GDP is constantly falling daily, the pressure on the corporate sector will mount rapidly and the brunt of which will be faced by the banks. Thus the Government must act quickly to raise capital so to safeguard the banks later.