Govt may not need to infuse fresh capital in PSU banks this fiscal

By: |
August 16, 2020 6:02 PM

The RBI's recent proposal to allow banks to restructure many types of loans will extend uncertainty over the banking sector's asset quality.

There may not be a sudden surge in non-performing assets (NPAs) after the six months moratorium comes to an end this month as it is followed by one-time loan restructuring.

The government may not have to inject fresh capital into the public sector banks (PSBs) as one-time loan restructuring permitted by the RBI has reduced additional fund requirement by them. Also the poor credit offtake on account of coronavirus pandemic may obliterate the need for significant growth capital during the current fiscal, sources said.

There may not be a sudden surge in non-performing assets (NPAs) after the six months moratorium comes to an end this month as it is followed by one-time loan restructuring, sources said, adding, provisioning requirement is also quite low for the debt recast accounts. Moreover, most of the public sector banks have taken approval in advance for raising Tier I and Tier II capital during the current fiscal depending on the need.

Despite all these, sources said, if at all there is a need for regulatory capital requirement by some public sector banks towards the end of the current fiscal, the government will provide that like it has done in the past. In 2019-20, the government infused Rs 70,000 crore into PSBs to boost credit for a strong impetus to the economy.

However, the government refrained from committing any capital in the Budget 2020-21 for the PSBs, hoping that the lenders will raise funds from the market depending on the requirement. After the second quarter numbers are out, the government may do performance appraisal and assess the capital position of the public sector banks.
According to a senior official of a public sector bank, loan restructuring will act as balm for the economy reeling under stress due to COVID-19 crisis.

Many borrowers are under stress because their businesses are running at 50 per cent of total capacity despite unlock impacting their cash flow, the banker said, adding their capacity to service debt thus have been compromised. Banks, under a board-approved loan restructuring programme, at this point can save such accounts turning bad by extending the repayment period, reduce interest rates or offer an extension of the moratorium to avoid an immediate shock.

Still some of the accounts would turn NPAs especially those which were under stress even before the outbreak of the pandemic and banks are gearing up for meeting that challenge, the official added. According to global rating agency Fitch the restructuring scheme may be designed to give banks more time to raise capital to address the impact of the crisis on loan portfolios.

“Raising capital remains challenging in the current environment. However, the new policy will reduce transparency over asset quality, which could further hinder some paths for capital-raising,” Fitch said. Earlier this month, the RBI permitted banks to go for one-time restructuring of loans that are facing stress due to the COVID-19 crisis with a view to mitigating risks to financial stability.

The RBI’s recent proposal to allow banks to restructure many types of loans will extend uncertainty over the banking sector’s asset quality, Fitch said. The scheme, which is applicable till March 2021, allows rescheduling of most retail and corporate loans, including MSME loans that were not impaired prior to March 1, 2020.

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