The Union Finance Ministry on Monday requested Parliament’s approval to infuse ₹20,000 crore in public sector banks (PSB) through recapitalization bonds.
The step becomes important as the infusion of capital will offer support to state lenders to handle the country’s deepening Covid-19 crisis, which has put borrowers under pressure, increasing the threat of increased delinquent assets. The infusion of capital through recapitalization bonds, however, will not affect the fiscal deficit in the current financial year as there is no cash outflow.
Finance Minister Sitharaman presented a supplementary demand for grants in Parliament, which reflects the additional expenses requested by various ministries above the amount allocated in the Budget. It also indicates the appetite for government spending.
The central bank had also called for an injection of capital into banks to help them deal with concerns about rising bad loans. “Going forward, there are certain points of tension in the financial system, which would require constant attention from regulators and policies to mitigate risks. The economic impact of the pandemic, due to the lockdown and anticipated post-lockdown compression in economic growth, may result in an increase in non-performing assets and the erosion of banks’ capital. Therefore, a recapitalization plan for PSBs and private banks (PVBs) has become necessary, “said Shaktikanta Das, Governor of the Reserve Bank of India 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 warned that if economic conditions worsen further this could rise to 14, 7% in a highly stressed scenario. .
While the 2020-21 budget did not set aside funds for capital infusion into state banks, in the previous fiscal year, the government had infused ₹Rs 70 billion in state banks to boost growth capital.
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