Home >News >India >Govt to infuse 20,000 cr into PSBs via recap bonds
Finance minister Nirmala Sitharaman.pti
Finance minister Nirmala Sitharaman.pti

Govt to infuse 20,000 cr into PSBs via recap bonds

  • Experts say recapitalization of state-owned banks is critical for economic growth
  • Sitharaman tables the first batch of supplementary demand for grants in the Parliament, reflecting additional expenses sought by various ministries beyond the budget allocations

State-run banks are poised to get 20,000 crore through recapitalization bonds this financial year, at a time the coronavirus crisis threatens to bump up bad loans across the banking system.

Finance minister Nirmala Sitharaman on Monday tabled the first batch of supplementary demand for grants in the Parliament, reflecting additional expenses sought by various ministries beyond the budget allocations.

It also indicates the spending appetite of the government.

“For meeting the expenditure towards recapitalization of public sector banks (PSBs) through issue of government securities— 20,000 crore," the supplementary demand for grants document read. Capital infusion through issue of government bonds will not impact fiscal deficit in the current financial year, as there is no cash outgo.

While the 2020-21 budget did not make any allocation for bank recapitalization, the previous budget had promised 70,000 crore to ‘boost credit for a strong impetus to the economy’. During 2017-18 and 2018-19, there were budgetary provisions as well as recapitalization bonds.

Experts said recapitalization of state-owned banks is critical for economic growth.

“Given the impact of the pandemic on the economy, it is essential for the banks to provide credit support to get the economy back on a growth trajectory. If banks are saddled with non-performing assets, new credit inflows will be difficult. To make the banks lend more, the government wants to infuse capital, which may have eroded due to higher pandemic provisions," said Kuntal Sur, a partner at PwC.

The central bank had also called for capital infusion into banks.

“There are certain stress points in the financial system, which would require constant regulatory and policy attention to mitigate the risks. The economic impact of the pandemic—due to lockdown and anticipated post-lockdown compression in economic growth—may result in higher non-performing assets and capital erosion of banks. A recapitalization plan for PSBs and private banks has, therefore, become necessary," Reserve Bank of India governor Shaktikanta Das had said in July.

The Reserve Bank also said that bad loans are expected to rise to a 20-year high to 12.5% of total advances by March 2021, and had warned that if the economic conditions worsen further, this may soar to 14.7% under the very severely stressed scenario.

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