Government needs to significantly increase its banking recapitalization plan in next five years considering the erosion of books of public sector banks due to rising bad loans, 15th Finance Commission chairman NK Singh said on Monday.
“If government is to have ownership, we need to have far more significantly and decisively increase banking recapitalization plan. In the next five years, there will be huge public outlay that will be needed to keep the public sector banks adequately recapitalized considering the erosion through non-performing assets of various kinds," Singh said speaking at a webinar organized by All India Management Association (AIMA).
The coronavirus pandemic has weakened the balance sheets of companies severely affecting their loan repayment capability. This is expected to adversely affect public sector banks in particular which were already battling high levels of non-performing assets even before the pandemic.
Singh said the Finance Commission is currently in discussion with the finance ministry and the Reserve Bank of India (RBI) to finalise the recapitalization needs for the next five years. “Finance Commission is having a separate presentation by the banking secretary and we are in consultation with the RBI regarding the needs of the banking recapitalization for the next five years which is the period of our award," he said.
RBI governor Shaktikanta Das also recently cautioned regarding stress points in the financial system going forward, which would require constant regulatory and policy attention to mitigate the risks. “The economic impact of the pandemic - due to lock-down and anticipated post lock-down compression in economic growth - may result in higher non-performing assets and capital erosion of banks. A recapitalisation plan for PSBs and private banks (PVBs) has, therefore, become necessary," Das said speaking at 7th SBI Banking & Economics Conclave organised by the State Bank of India earlier this month.
On providing further fiscal stimulus to boost demand in the economy, Singh said government has kept its options open and will act at an appropriate time with the ammunitions available with it. “Yes, given the kind of distress we are in currently, it is quite understandable that people are saying the fiscal package which so far been announced could have more, deeper, differently crafted. On this the last word has not been said. The virus is very much there. What more response is needed is something on which government has an open mind on the subject. Many in the government also share the sentiment that the appropriate time is perhaps now. The government is fully cognizant to act sooner than later," he added.
Singh said though GDP growth will remain in negative territory in FY21, there will be very sharp V-shaped recovery in the third and fourth quarters due to a lower base effect. However, he maintained that whether the growth momentum will be sustainable in FY22 is the real question having after the initial base effect erodes.
India’s debt to GDP ratio may be closer to 80% or even higher, with the slowdown in economic activities that has led to revenue shortfall with expenditure remaining inelastic, Singh said. “For a country of India’s size and per capita income, the ideal debt to GDP ratio as a whole should be around 60% and enabling the 60% in the medium term require the fiscal deficit to be aligned towards this debt objective," he added assuring that India will not move in a direction which would make the stability of the macro-economic framework a very questionable one.