1. Bad loans crisis: Narendra Modi government may offer more funds over and above Rs 10,000 cr to recapitalise PSBs

Bad loans crisis: Narendra Modi government may offer more funds over and above Rs 10,000 cr to recapitalise PSBs

The government is open to providing more funds for the recapitalisation of public-sector banks than the budgeted Rs 10,000 crore for the current fiscal, should there be a “pressing need” for it, an official source said.

By: | New Delhi | Published: April 14, 2017 6:07 AM
Banks need capital primarily to cater for the credit requirements of borrowers as well as to set aside funds to tackle bad loans. (Reuters)

The government is open to providing more funds for the recapitalisation of public-sector banks (PSBs) than the budgeted Rs 10,000 crore for the current fiscal, should there be a “pressing need” for it, an official source told FE. Analysts had termed the budgetary allocation for recapitalisation in 2017-18 too low, considering that PSBs are struggling with massive bad loans. The total stressed assets (gross non-performing assets and restructured standard advances) of commercial banks stood at Rs 9.64 lakh crore as of December 2016, with most of them belonging to the PSBs.

“Funds are not a major constraint. In times of a pressing need, the government will pitch in, but that doesn’t mean we will be very liberal in providing funds,” a senior government official said. “It’s taxpayer’s money and we have to adopt utmost care in allocating that. So, all such funds for recapitalisation will be tied to strict conditions. The banks that seek more funds will have to comply with all these stipulated conditions,” the official added.

Banks need capital primarily to cater for the credit requirements of borrowers as well as to set aside funds to tackle bad loans. Although credit growth has been muted in recent years, the rise of stressed assets has raised PSBs’ provisioning requirements, making capital infusion by the government so important.

As part of its Indradhanush plan launched in August 2015, the government is supposed to provide Rs 70,000 crore over a four-year period through 2018-19 (Rs 25,000 crore each for each of the first two years and Rs 10,000 crore for each of the next two years) for the recapitalisation of the PSBs.

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Already, the department of financial services this month sent a letter to some public-sector banks, setting conditions for recapitalisation, including effective NPA management, sale of non-core assets, further closing of loss-making branches and temporary trimming of employee benefits, if required.

NPAs reached 9% of total advances by September 2016 — double their level a year earlier. Importantly, more than four-fifths of the NPAs were in the public-sector banks, where the NPA ratio had touched almost 12%. Taking a sample of 39 top banks, CARE Ratings has estimated that NPAs accounted for Rs 6,97,409 crore — or 9.3% of their advances — as of December 2016.

While announcing the Indradhanush plan, the government had said though the PSBs were adequately capitalised then and were meeting all the Basel III and RBI norms, it still wanted to capitalise them to “keep a safe buffer over and above the minimum norms of Basel III”. It had estimated PSBs’ total capital requirement of about `1,80,000 crore over a four-year period through 2018-19.

This estimate excluded the internal profit generation by PSBs and was based on the assumption of a credit growth rate of 12% for 2015-16 and 12-15% for the next three years. It then proposed to provide `70,000 crore of budgetary support out of the total requirement.

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