The step assumes significance as capital infusion will provide support to state-owned lenders as the deepening covid-19 crisis that has put borrowers under pressure
The union finance ministry on Monday sought Parliament’s approval to infuse ₹20,000 crore into public sector banks (PSBs).
The step assumes significance as capital infusion will provide support to state-owned lenders as the deepening covid-19 crisis that has put borrowers under pressure, increasing the threat of higher non-performing assets (NPAs).
Finance minister Nirmala Sitharaman on Monday tabled the first batch of supplementary demand for grants in the Parliament, which reflects the additional expenses sought by various ministries over and above the amount allocated in the Budget. It also indicates the spending appetite of the government.
“For meeting expenditure towards recapitalization of public sector banks through issue of government securities— ₹20,000 crore," according to the supplementary demand for grants document. Capital infusion through government issue of bonds will not impact fiscal deficit in the current financial year as there is no cash outgo.
While the Budget for 2020-21 did not make any allocation for recapitalization of public sector banks, in the previous fiscal, the government had announced infusion of ₹70,000 crore into state-owned banks to ‘boost credit for a strong impetus to the economy’. During 2017-18 and 2018-19, the mobilization of capital took place through budgetary provisions as well as recapitalisation bonds.
Experts said recapitalization of state-owned banks is a crucial step to propel economic growth. “Given the impact of pandemic on the economy, it is essential for the banks provide credit support to get the economy back to 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," Kuntal Sur, Partner at PwC said.
The central bank had also called for capital infusion into banks to help them deal with the concerns of rising bad loans and capital erosion of banks.
“Going forward, 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 lock-down and anticipated post lock-down compression in economic growth - may result in higher non-performing assets and capital erosion of banks. A recapitalization plan for PSBs and private banks (PVBs) has, therefore, become necessary," Reserve Bank of India Governor Shaktikanta Das had said in July.
The RBI had 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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