FM Nirmala Sitharaman announces capital infusion of Rs 70,000 crore for PSBs

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Published: August 24, 2019 2:41:48 AM

According to a recent Crisil report, PSBs — which make up for roughly 80% of the 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.

Earlier in the day, 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 just 6.2%.

Faced with little choice but to boost faltering demand through greater credit flow, finance minister Nirmala Sitharaman on Friday announced an “upfront” capital infusion of the budgeted Rs 70,000 crore into public-sector banks (PSBs) in FY20, departing from the practice of doing it in phases throughout the fiscal. The finance ministry expects the move to spur additional lending of as much as `5 lakh crore by state-run banks to critical sectors of the economy, including small businesses and non-banking financial companies (NBFCs), that have been gasping for liquidity.

Finance secretary Rajiv Kumar said the distribution of the proposed capital among PSBs will be finalised soon.
The state-run National Housing Bank will also offer an additional `20,000 crore to eligible housing finance companies (HFCs) — some of which are facing an asset-liability mismatch — in its financial year through June 2020 to shore up liquidity. This is on top of an extra Rs 10,000 crore the NHB had announced for HFCs earlier this month for retail loans in the affordable housing segment.

To expedite the decision-making process and prevent harassment for genuine commercial decisions by bankers at a time when several senior bankers have been accused of being complicit in frauds, the Central Vigilance Commission has issued directions that the Internal Advisory Committee in banks will classify cases as vigilance and non-vigilance.

Any decision of the Internal Advisory Committee (IAC) and the bank’s chief vigilance officer will be treated as final.
The government also allowed NBFCs to use the Aadhaar-authenticated bank KYC to avoid repeated processes. This was a demand of industry body FIDC, as all the transactions undertaken by NBFCs —including disbursement of loans and collection of repayments — happen through the bank accounts of borrowers. Currently, NBFCs are required to do fresh KYC authentications of their borrowers who already have bank accounts. Necessary changes will also be made in the PMLA rules and Aadhaar Regulations, the government said.

Sitharaman also said the scheme under which the government would offer a one-time partial guarantee to state-run banks to buy pooled assets worth `1 lakh crore of financially-sound NBFCs this fiscal will be monitored at the highest level. The scheme, announced in the FY20 Budget, will cover PSBs’ first loss of up to 10 and the government recently notified details of the scheme.

As for the capital for PSBs, the latest infusion will be on top of the `1.06 lakh crore that the government provided last fiscal, which was higher than `88,139 crore in FY18. In fact, the Modi government had provided capital of roughly `2.5 lakh crore in its first term. The infusion will again be through recap bonds, which are essentially off-Budget items, although the interest on them is paid from the Budget.

Earlier in the day, 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 just 6.2%.

Sources had earlier told FE that PSBs with decent bad loans ratio will be offered growth capital, while those under the central bank’s corrective regime (Allahabad Bank, United Bank of India, Corporation Bank, UCO Bank, Central Bank of India and Indian Overseas Bank) could get just about enough to meet regulatory requirements, said the sources.

Although overall credit growth continues to be around 12%, marginally lower than the growth of 13.3% at the end of March, the growth in loans to MSMEs has remained only a fraction of it and export credit growth has contracted. 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 and they are, therefore, in a position to step up lending, according to a finance ministry statement earlier this month.

According to a recent Crisil report, PSBs — which make up for roughly 80% of the 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.

However, as pointed out by FE recently, while the government infused over Rs 2.5 lakh crore since FY15, the share of PSBs in the market capitalisation of all banks plunged to just 26% in late June from almost 43% on May 23, 2014, just before Prime Minister Narendra Modi came to power.

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1Housing finance firms to get additional liquidity support of Rs 20,000 crore
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