Mumbai: The government wants banks and non-banking financial companies to go and lend freely. For that, it is willing to give 70,000 crore to the banks it owns and nudge them to buy 1 trillion worth of loans from non-bank lenders to free up their capital.

After three years of massive recapitalization that was used only to stay alive, banks may finally find capital for growth.

Analysts had estimated the requirement for capital by public sector banks in FY20 at 40,000-50,000 crore. The budget has proposed an infusion of 20,000 crore over and above these expectations. Ergo, there is capital available for growth to banks.

But this is likely to be just a trickle of capital for growth purposes.

“How much capital will be available for growth depends on which bank gets how much money. Some of the PSU banks are still under PCA (Prompt Corrective Action) and for them capital infusion would just be to meet norms," said an analyst at a global brokerage firm on condition of anonymity.

This is a key factor as weak banks would only eat up the funds, while strong banks can spare some money for lending.

The balance sheets of banks still have a hole in them even though this hole is smaller now. Most public sector banks were loss-making in FY19 and much of the more than 1 trillion capital that they received last year was consumed to repair their balance sheets and meet regulatory requirement on capital. For some, it was the lifeline to come out of the quarantine scheme of PCA that restricts riskier lending.

(Photo: Naveen Kumar Saini/Mint)
(Photo: Naveen Kumar Saini/Mint)

The series of defaults by big non-bank lenders during the first three months of FY20 and the unresolved issue of Infrastructure Leasing and Financial Services Ltd indicates that stress on the loan books of banks is still significant. If more non-bank lenders begin to show stress and liquidity problems, the toxic loan pool will only grow.

For this, the budget has given an option of buying out loan pools from non-bank lenders. It is even willing to bear the first loss of such asset pools for banks. But here is the catch: these pools would invariably be the best of the loans and from “fundamentally sound" non-bank lenders. Essentially, not many non-bank lenders would be able to sell their asset pools quickly. Moreover, once they sell their good-rated loans, they would be left with dodgy assets themselves.

In all this fund flow, how much would be available for growth is a big question. For banks, unless they ratchet up their recoveries, which in turn depends on timely insolvency proceedings, much of the capital they receive may only flow into provisioning.