PSU banks may get extra funds infusion as Modi govt looks to boost credit flow

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Updated: October 03, 2019 7:08 AM

The finance ministry has already allocated Rs 59,807 crore for infusion this fiscal and is likely to do the rest soon.

Credit flow boost, Department of Financial Services, PSB, corporation tax rates, Oriental Bank of Commerce , Modi government, GDP growthThe Department of Financial Services is likely to place the supplementary demand soon for the additional capital.

Having announced an upfront capital infusion of the budgeted Rs 70,000 crore into public-sector banks (PSBs) this fiscal, the government is contemplating additional infusion in FY20 to further shore up their capital base and bolster the ability to step up lending, sources told FE.

The finance ministry has already allocated Rs 59,807 crore for infusion this fiscal and is likely to do the rest soon. The Department of Financial Services is likely to place the supplementary demand soon for the additional capital. The plan is part of the government’s efforts to strengthen PSBs and stimulate faltering consumption and the economic growth through a greater flow of credit at reasonable rates. Moreover, adequate capital will lend comfort to the 10 PSBs that will be amalgamated to create four larger entities. Already the government has directed PSBs to hold loan outreach programmes in 400 districts ahead of Diwali festivities.

Also read: Corporate tax cut is a signal to structural reforms: CEA KV Subramanian

While the precise amount of extra infusion is not immediately clear, according to one of the sources, the finance ministry has indicated that it would pump in more should there be a pressing need for it. Last month, the government said the infusion of Rs 70,000 crore would enable PSBs to lend an additional Rs 5 lakh crore.

Since the infusion will be through recap bonds, which are essentially off-Budget items, it won’t immediately upset the Centre’s fiscal math, especially at a time when the government has estimated gross revenue forgone of Rs 1.45 lakh crore in FY20 due to a sharp cut in corporation tax rates. However, such recap bonds add to the country’s stock of debt and interest on them is paid from the Budget.

The government had infused Rs 1.06 lakh-crore capital into the PSBs last fiscal, compared with Rs 88,139 crore in FY18. In fact, the Modi government had provided roughly Rs 2.5 lakh-crore capital in its first term. The government last month said Oriental Bank of Commerce and United Bank would be merged into Punjab National Bank to create the country’s largest state-run bank after SBI. Similarly, Syndicate Bank will be amalgamated with Canara Bank and Union Bank, Andhra Bank and Corporation Bank will be merged. Allahabad Bank will also be merged with Indian Bank.

Recently, citing stress in the shadow banking space, Moody’s cut India’s GDP growth projection for the calendar year 2019 by as much as 60 basis points to 6.2%. Earlier this week, the global rating agency said among the 13 Asia-Pacific economies, India’s banking system is the most vulnerable to the deterioration in corporate debt repayment capacity, along with Indonesia’s.

Having risen at a double-digit pace in recent months, non-food credit growth slid to 9.9% as of August 30, against 12.2% a year earlier, according to the latest RBI data. Similarly, loans to exporters continue to contract, although the central bank has now relaxed the priority-sector lending norms for exporters to ensure a greater flow of credit to them.

However, with the turnaround in the bad loan cycle, high provision cover of over 75% of PSBs and record recovery, their balance sheets are healthier than before. These lenders are, therefore, in a position to boost lending, the finance ministry said recently. It also said loans to some key sectors remained robust, with disbursement of Rs 11.83 lakh crore for the MSME sector in FY19, against Rs 8.53 lakh crore in FY18. Banks lent Rs 2.19 lakh crore as home loans in FY19, against Rs 1.81 lakh crore in FY18.

According to a recent Crisil report, PSBs — which make up for roughly 80% of bad loans in the banking system — will see their gross NPAs shrinking by as much as 400 bps to 10.6% by March 2020 from 14.6% in March 2018.
Separately, the government recently told Parliament that gross NPAs of state-run banks dropped to Rs 8,06,412 crore as of March 2019 from the peak of Rs 8,95,601 crore a year earlier, highlighting the improvement in the PSBs’ asset quality.

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