Bank raising funds from Private Sector: An Analysis

Profile of Author: Priya Mishra is a 3rd year law student pursuing B.B.A LL.B from MMDU, Ambala. Corporate Law, Company Law, and ADR hold her keen interests.

HISTORY

• As we know, the private sector banks played a very significant role in the expansion and improvement of joint-stock banking in India.
• The transition of private sector banks can be witnessed by the late first half of the 20th century.
• With the establishment of State Bank of India in 1955 and thereafter two sessions of bank nationalization that is 14 major banks in July 1969, another in April 1980 with the take over of 6 banks by the government of India, the role of private sector banking started declining.
• The New Private Sector Banks began printing balance sheets (1995-96). In that year the share of OPBs(old private banks) in total assets was 6.2 percent while that of NPBs was 1.4 percent. The NPBs had improved their market share to 5.3 percent by 1999-2000 at the cost of PSBs. The share of private sector banks in the total number of branches in 1992-93 was only 8.33 percent. In 2002-03, the share of private sector banks in total bank branches increased a bit by 8.75 percent.
• For foreign investment, the Government has been pursuing an open door policy and opened the floodgates forth the inflow of foreign capital in the form of FOI, investments by foreign institutional investors, and NRI's in the banking sector too.
• The new private sector banks were allowed to raise capital offerings from foreign institutional investors up to 20 percent and from NRIs up to 40 percent of their share capital.[1] Promoter’s stake in the banks was limited to 49 percent.

IMPORTANCE OF BANKING SYSTEM

• In this prevailing period, banks play a crucial role in all countries. Their strategies and policies directly influence the growth, advancement, development, employment, prices, national income, etc of the economy.
• Banks have an apex role in the economy. Any job or occupation, which requires investments and financial resources, certainly compels the participation of banks and financial institutions.

AN OVERVIEW

It is well known that the Banking system in India is very strong. The three rights Security, Valuation, and Growth all three are provided by the Indian Market now. The government is efficiently taking the necessary steps to regulate the economy of the whole country.

When the market is looking for alternative investments as most capital markets are not giving very good returns, it becomes a reasonable thing to raise capital. If an individual takes off with some better possibilities, it is bound to succeed. Most private banks have acquired good equity during this period.

As per the report, the Lenders are making a beeline to raise capital and prepare for adversities in a year of expected low credit growth amid the uncertainties over how the covid-19 situation will unfold and affect asset quality.[2]

Banks fix to lift capital by striking equity markets or through debt instruments. Specialists also had revealed that Indian banks will expect more capital to tackle the covid-19-led crisis. As per the reports, there is a rise in the number of banks and other financial institutions knocking the capital market, but institutional investors are attempting additional precautions.

The capital requirements for PSBs were earlier estimated at ₹10,000-20,000 crore for FY21 and the Centre had expected them to raise capital from markets, with expectations of improved asset quality and profitability, said Icra.

PSBs have been at the forefront of credit delivery to various sectors, including small businesses, during the pandemic. The government has not budgeted any capital infusion for the lenders in FY21. Private sector banks will need to raise ₹25,000-48,300 crore over FY21 and FY22, Icra added.

Mint had reported on 30 April that IDFC First Bank, RBL Bank, Kotak Mahindra Bank, Bank of Baroda, Yes Bank, and IndusInd Bank plan to raise at least ₹35,000 crores in equity capital. Kotak Mahindra Bank raised ₹7,442.5 crores in May and IDFC First Bank raised ₹2,000 crores in June.[3]

Why are Banks striving to raise capital?

• In the last few months, public sector banks haven’t been competent to raise funds even as major private sector banks have done so. Reserve Bank of India (RBI) emphasized the criticality of the recapitalization of banks amid the pandemic and monetary downturn.[4]
• Public Sector Banks requires around Rs 60,000 crore in the recent monetary year, but these banks are presently striving to lift up the capital despite facing asset quality challenges amid the Covid-19 pandemic as per the analysts.
• Even in this year's union budget, the government hasn’t allocated any capital for PSBs, after infusing Rs 2.65 lakh crore in the previous three fiscals.
• On the other hand, the private banks have done satisfactorily. ICICI Bank raised Rs 15,000 crore, Axis Bank lifts up Rs 10,000 crore from the markets to bolster their capital probabilities. Also, the battling lender Yes Bank lifted Rs 15,000 crore last month.[5]

Here, one more question arises,

Why are PSBs unable to raise funds?

• It is observed that this was due to a stock price correction and the government shareholding.

The Public Sector Bank requirements-

• One-time loan restructuring as it sought to give banks more space. This will alleviate some asset quality stress in the existing fiscal and the degree of capital that was otherwise required.
• The further alternative for the Banks is to monetize the non-core assets. PSBs have stakes in insurance companies, mutual fund houses, etc.

CONCLUSION

Managing the country's monetary organization mandates a distinct way that stimulates financial organization to comprehend management principles, to be accountable for upholding the citizens and the financial organizations because current issues which occurred due to poor surveillance of banks pressurize the entire financial organization of the country.

As we know, 'after every storm, there is a good time coming'.The minute this Covid catastrophe gets over, economic activity will bottom out and there will be a spectrum for growth. That transition will be for those who have got sufficient capital. The government is also looking for future growth and possibilities. It is favorable that the economy will ricochet back after this epidemic.

FAQs

1.What are Public sector banks?

• They are a major type of bank in India where a. The majority stake is held by the government.

2.What are Private sector banks?

• They are the ones where the majority stake is held by private organizations and individuals. Private banks have profit maximization set as their main goals.

[1]

https://shodhganga.inflibnet.ac.in/bitstream/10603/3712/13/13_chapter%206.pdf

[2],[3]

https://www-livemint-com.cdn.ampproject.org/v/s/www.livemint.com/industry/banking/banks-look-to-raise-funds-as-uncertainty-prevails/

[4],[5]

https://theprint-in.cdn.ampproject.org/v/s/theprint.in/economy/why-public-sector-banks-are-struggling-to-raise-capital-but-private-banks-are-having-it-easy/490029/

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