Budget 2017: No Increase In Allocation For Bank Recapitalisation
No increase in allocation for bank recapitalisation is a negative for public sector banks
The government will set aside Rs 10,000 crore to infuse capital into public sector banks in fiscal 2018, said Finance Minister Arun Jaitley as he presented the Union Budget 2017-18.
The government had planned to infuse Rs 70,000 crore into state-owned banks over a four-year period until fiscal 2019. The capital infusion was front-loaded with Rs 25,000 crore put in during fiscal 2016 and fiscal 2017. For the remaining two years, the government had allocated Rs 10,000 crore each.
The decision to not increase the allocation is negative for banks, which need capital far in excess of what has been promised by the government.
Need For Capital Buffer Against Bad Loans
Government banks are in urgent need of capital to provide for a surge in bad loans and to support growth.
According to the Economic Survey, released ahead of the Union Budget on Wednesday, gross non-performing assets (NPAs) climbed to almost 12 percent of gross advances for public sector banks at end-September 2016. It noted that India’s NPA ratio is higher than any other emerging market with the sole exception of Russia. The resulting fund crunch has led to slow credit offtake, especially to the industry and medium and small enterprises, the Survey noted.
In a report released on Tuesday, rating agency Fitch said that stressed assets may climb further in the aftermath of the government’s decision to scrap Rs 500 and Rs 1,000 notes, which has led to a temporary slowdown in the economy.
Banks have found it difficult to provision adequately for bad loans due to low levels of capitalisation. Rating agencies have noted that the capital needed by banks is far higher than the Rs 70,000 crore allocated by the government. ICRA estimates that Rs 1.5-1.8 lakh crore in capital will be needed during the FY17-FY19 period.
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