India’s macroeconomic stability is under threat from non-performing assets, which have shot up from 4.3 per cent of advances or, Rs 2.9 lakh crore, in March 2015 to 9.2 per cent of advances or, Rs 6.7 lakh crore, in December 2016. Although loan recoveries and upgrade of stressed accounts of public sector banks have risen 60 per cent and 43 per cent respectively year-on-year, they are forced to sell assets.
With Basel III norms — which make it mandatory to have a capital adequacy ratio of nine per cent and a further reserve buffer of 2.5 per cent of risk weighted assets — kicking in by March 2019, banks are running against time to shore up their capital.
The government’s promise to allocate Rs 70,000 crore over four years, with Rs 10,000 crore allotted in this Budget following the Rs 25,000 crore last year (only 75 per cent of it was infused), is dwarfed by the estimated Rs 1.5 lakh crore that PSBs need to equip themselves to meet the norms.
One way of managing this perilous situation is through the efficient use of AT1 contingent convertible bonds, with a suitable “trigger point” so that they convert into equity at just the right time and shore up the tier 1 capital of banks. Asset quality review, which concludes by March, may throw some light on the stressed assets.
T Sachidanand, Chennai
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201 · E-mail: firstname.lastname@example.org
All letters must have a postal address and telephone number