Provision of funds reassured by government to the Public Sector banks
Some relief to the state banks as the provision of funds has been assured by the government as the current situation of the ongoing pandemic may lead to a surge in bad loans while a slowdown in the economy, as told by three government and banking sources. The public sector banks may need at least Rs 20-25000 crore of capital infusion from the government to tackle the oncoming issue. However, these numbers may alter depending on the situational changes.
“The NPAs(non-performing assets) could remain an issue and the government may need to make a provision for some capital infusion in the public sector banks,” said a senior government official involved directly in the issue.
The government had already arranged a provision of funds of Rs 3.5 lakh crore to the besieged banks in the last five years. In this financial year’s budget announcement in February, the banks were encouraged to tap capital markets for funds instead of being allocated with any funds for capital infusion.
“Given the pressure on their credit profiles, we expect public sector banks’ access to equity capital market will remain challenging, at least over the next few quarters,” Alka Anbarasu, vice president and senior credit officer, financial institutions at Moody’s Investors Service said.
The Majority of the share of nearly Rs 11 Lakh crore of bad loan piling up onto the heads of the Indian banks rests with the state-owned banks. Adding to the miseries, loan growth for the banking industry has also taken a dip too low single digits putting an additional burden on these lenders.
“We expect public sector banks will require further capital support from the government as rising asset risk will lead to a deterioration in their profitability and internal capital generation,” Anbarasu added.
Most of the lenders will probably approach the government seeking capital requirement in the second or third quarter of the current financial year despite reassurance.
“On top of the list right now are the mergers and to ensure how one can tackle the COVID-19 related problems. Currently, most banks are in a position to meet their capital requirement for the first half of this financial year,” said the CEO of a public sector bank.
India had previously announced, in August last year, a cluster of mergers involving 10 state-owned banks to ensure stronger balance sheets leading to a boost in lending and revival of economic growth.