New Delhi: The finance ministry does not plan to increase allocation of funds beyond what has been budgeted to shore up capital buffers of state-run banks as it expects the lenders to resolve some of the bad loans weighing them down, a ministry official said.

Most state-controlled banks reported huge losses in the year ended 31 March after the Reserve Bank of India asked them to end all loan restructuring schemes. This increased the pile of bad loans. The huge losses wiped out the entire 1 trillion capitalization done by the government in 2017-18.

The losses prompted Arvind Subramanian, the former chief economic adviser to the finance ministry whose tenure ended last week, to seek additional capital infusion for state-run banks. Last year, the government unveiled a 2.1 trillion capitalization plan spread across two years through a mix of direct capital infusion, recapitalization plans and fund raising from the market.

For the current financial year, the government has budgeted 65,000 crore to capitalize state-run banks.

“Banks are reporting a turnaround in the first quarter results. Other banks like Punjab National Bank (PNB) may also see a recovery. Money stuck in cases getting resolved in IBC (Insolvency and Bankruptcy Code) will start to flow in. So, as of now, we don’t see any reason for increasing the capital allocation," the senior finance ministry official quoted above said on condition of anonymity.

While Bank of Baroda (BoB) and Canara Bank have seen a turnaround in their first quarter results, the government is expecting other banks including fraud-hit Punjab National Bank (PNB) to improve their performance in this fiscal.

Canara Bank’s profit rose 11.5% to 281 crore while BoB’s profit rose 159% to 528 crore.

Both banks reported losses in the quarter ended 31 March and for the full year 2017-18. Canara Bank reported a loss of 4,860 crore in the fourth quarter of 2017-18 and 4,222 crore for the full year.

BoB reported a loss of 3,102 crore for fourth quarter of 2017-18 and 2,431 crore in the full year.

So far this year, to ensure banks maintain their capital adequacy ratio, the government has used the recapitalization bonds amounting to 11,336 crore to capitalize five state-run banks including PNB, Indian Overseas Bank and Corporation Bank. These banks had the weakest tier 1 capital ratios among state-run banks.

In a 25 July note, ratings company Moody’s warned that the government may have to infuse more capital into state-run banks subject to their performance, so that they meet the minimum required regulatory capital thresholds.