Budget, banking depts spar over 1.25-trln-rupee recapitalisation plan

Monday, Aug 3, 2020


–Govt source: Banking dept seeks 1.25 trln rupees for bks' fund infusion

–Budget dept has reservations on bks capital infusion plan 

–Banking dept sought PSU bank fund infusion via bonds

–Cabinet to take final call on PSU bank fund infusion


By Adrija Chatterjee and Shubham Batra


NEW DELHI – The Budget and banking departments of the finance ministry are at loggerheads over a demand for 1.25 trln rupees to recapitalise public sector banks in the current financial year ending March.


The extra allocation sought by the Department of Financial Services has been turned down for the time being by the Budget Division because of limited fiscal space.


"They (Department of Financial Services) have asked 1.25 trln rupees for recapitalisation, and the Budget Division has expressed concerns over the proposal," a finance ministry official told Cogencis.


The Budget for 2020-21 (Apr-Mar) has not made any allocation for recapitalisation of public sector banks.


Though recapitalisation of public sector banks is a below the line item and does not get counted as fiscal deficit, the Budget Division is worried about its impact on interest payments.


The interest payment liability is rising every year, the official said.


"Recapitalisation bonds create liabilities and become a recurring expenditure every year…but the final decision will be taken by the Cabinet," the official said. 


The government had issued recapitalisation bonds worth 654 bln rupees to public sector banks in 2019-20. Between 2008-09 and 2018-19, the government has infused 3.16 trln rupees as capital into public sector banks.


The capital infusion has helped improve the capital adequacy ratio of public sector banks to 13.0% in March 2020, up from 12.2% a year ago. However, the capital adequacy ratios are heavily skewed among public sector banks.


While some public sector banks like the State Bank of India have healthy capital ratios, for others they are just about the minimum regulatory requirement.

The COVID-19 pandemic and loan moratorium have put severe strain on banks, especially the public sector banks.


According to RBI's Financial Stability Report, the gross non-performing asset ratio of public sector banks is likely to surge to 15.2% by March 2021 from 11.3% a year ago because of the economic disruption caused by the COVID-19 pandemic.


The initial signs of stress are likely to emerge on the books of banks during Oct-Dec after the six-month loan moratorium ends in August.


Many public sector banks do not have the balance sheet strength or capital to make higher provisions in the event of a rise in bad loans. 


Cogencis had last month reported that the Reserve Bank of India has suggested to the government to formulate a recapitalisation plan for public sector banks to manage the impact of COVID-19 on their capital positions.


RBI Governor Shaktikanta Das had also last month said that a recapitalisation plan for public sector banks was necessary since the lockdown may result in higher non-performing assets and capital erosion of banks.


However, the central government's thinking seems to be different. Last month, Chief Economic Adviser Krishnamurthy Subramanian said currently there was no immediate need to recapitalise state-owned banks.


The central government's finances are under severe strain because of the pandemic. The government's fiscal deficit as on Jun 30 touched 83.2% of the full year Budget target of 7.96 trln rupees, primarily on account of a sharp fall in revenues due to the nationwide lockdown imposed to curb the spread of COVID-19.  End


Edited by Vandana Hingorani


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