Banking on capital1 min read . Updated: 22 Feb 2019, 04:27 AM IST
The government's inflated bank recapitalisation plan will ease the banking sector's troubles, but it won't be enough
The government’s latest plan to infuse $6.8 billion as capital in 12 state-run banks will ease the sector’s troubles, but it won’t be enough.
The infusion is part of a bank recapitalisation plan announced in 2017 under which the government aimed to provide about $30 billion in two years, partly through the issue of recapitalisation bonds and budgetary support and the rest expected to come from fund-raising by banks themselves. The sum was later enhanced by about $5.8 billion.
But banks are finding it hard to raise money given high levels of debt on their books.
Although some of this stress has eased, a string of farm loan waivers promised by various state governments and political parties could encourage defaults. Even existing bad loans aren’t getting resolved as fast as hoped under the new debt resolution mechanism.
In such a situation, a complete turnaround may still be a few years away and banks may need another $3.5 billion or so next year to maintain their capital ratios, according to Moody’s Investor Service.
Curiously, in the interim budget, the government didn’t provide any money towards bank recapitalisation next year. Clearly, more needs to be done.