FM announces ₹20,000 crore for recapitalisation of public sector banks

New Delhi: Finance minster Nirmala Sithraman on Monday, while presenting the Union Budget for 2021-21, announced that the government will set up an asset reconstruction company (ARC) and an asset management company (AMC) to house stressed assets currently in book of Indian banks.

Besides the setting up the long-awaited bad bank, the government will also infuse ₹20,000 crore into public sector banks as part of its recapitalisation plan. The Economic Survey, released 29 January, had called for a clean up of banks' balance sheets after the forbearance to be accompanied by a recapitalisation.

Implication

While details of the bad bank are not immediately available, it will certainly ease the bad loan burden by taking over those assets and attempting recoveries. Experts have been arguing that a bad bank will be effective in cleaning up the bad loan menace so that banks can solely focus on credit growth, which has taken a hit following the coronavirus pandemic.

The central bank has already warned of decadal high toxic assets in the Indian banking system and the bad bank therefore comes at a suitable time. The bad loan ratio of banks in India could rise 600 basis points (bps) to 13.5% under the baseline stress scenario by September this year, the highest in over 22 years, the Reserve Bank of India (RBI) said in its Financial Stability report last month.

The Rs20,000 crore capital infusion announced will allow more room for provisioning of bad assets and boost credit growth, provided demand makes a comeback.

Context

At Mint's Road to Recovery webinar panelists had cited the example of Danaharta, a sovereign bad bank created in Malaysia to clean bad loans after it reached unsustainable levels. India, the experts had said, could take a lesson or two from that initiative a build a bad bank with its own set of regulations so that bankers can devote more time to flow of credit instead of only trying to recover legacy bad loans.

While the government did not allocate any infusion in the FY21 Budget, it had later sought Parliament nod to infuse ₹20,000 crore through a supplementary demand for grants.

Meanwhile, rating agency Icra expects capital requirements for public sector banks will largely arise on account of the estimated Rs23,000 crore additional tier I (AT-I) bonds where a call option would fall due next year. It was believed that these banks would require up to Rs43,000 crore in a worst-case scenario.