Govt to infuse ₹20,000 crore into state-run banks via recap bonds
NEW DELHI: 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 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 nonperforming 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. 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 severely stressed scenario.