When finance minister Arun Jaitley presented the budget for 2018-19, he allocated 65,000 crore to recapitalise public sector banks (PSU banks). Late last week, the PSU bank recapitalisation outlay was increased by a little over 63% to 1.06 trillion. Mint takes a look at what this means for the banking industry.

What has been the story so far?

PSU banks have been facing a massive problem of non-performing assets (NPAs), or bad loans. Bad loans are those which have not been repaid for a period of 90 days or more. As of 30 September, NPAs stood at 8.71 trillion. In order to keep these banks going, the government needs to infuse more capital into them. Last year, the government invested 90,000 crore. Between April and November, it invested 22,904 crore. This apart, banks have raised some money from the market. Of this, 8,247 crore has gone to Punjab National Bank, the second-largest PSU bank in India.

In what way will PSU bank recapitalisation help?

The Reserve Bank of India (RBI) has put 11 public sector banks, which were facing a severe bad loans problem, into the prompt corrective action (PCA) framework, severely limiting their lending and deposit-raising operations. The government hopes that with the fresh infusion of capital, four or five banks will be able to exit the RBI PCA framework. More importantly, it will also prevent three banks, including Punjab National Bank, from becoming part of the PCA list. Besides, it will help these banks to lend more. Some capital will also be infused into banks that are being merged.

Is the Indian economy starved of bank lending?

Non-food credit has been growing by more than 15% year-on-year since 9 November. This is the best credit growth the banking sector has witnessed in two years.

So, what is the problem?

Banks have accumulated a massive amount of bad loans over the years by lending to industry. Hence, they are in no mood to lend to it. As of the end of October, year-on-year lending growth to industry was just 3.7%. Growth in lending to micro and small industry was even worse at 1.6%. Lending to medium and large industries grew by 10.9% and 3.8%, respectively. With the fresh infusion of capital to PSU banks, the government expects lending to industry, in particular small and micro industry, to grow.

Will bank recapitalisation solve this issue?

Taxpayers have paid for PSU bank recapitalisation through higher excise duty on petrol and diesel. As of the end of September, 95 borrowers had defaulted on loans of more than 1,000 crore, with the total amounting to 5.57 trillion. This is where banks need to concentrate for recoveries. The good news is that PSU banks have managed to recover 60,726 crore between April and September.

Vivek Kaul is the author of the Easy Money trilogy.

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