The economy, which witnessed a record 23.9% slide year-on-year in the June quarter needs a massive credit push to get back on its feet, especially as lockdown-related curbs have been substantially eased now.

The government is willing to infuse extra capital into select state-run banks this fiscal to boost lending should there be a pressing need for it but it expects the recent allocation of Rs 20,000 crore to suffice, a source told FE.

Having extended Rs 70,000 crore to state-run banks (including IDBI Bank) last fiscal and as much as Rs 3.1 lakh crore in the past five years through FY20, the government had refrained from providing for more capital in the Budget for FY21. However, the Covid-19 outbreak and consequent pressure on the banks’ balance sheets forced it to seek Parliamentary approval last month for a supplementary demand of Rs 20,000 crore to extend fresh capital.

“The government has earmarked capital now and public sector banks (PSBs) are also trying to raise capital on their own. Thanks to the one-time restructuring window extended by the RBI, the possibility of a sudden, massive spike in bad loans this year due to the pandemic has subsided. So, as of now, chances of further capital requirement look very remote,” said the source.

“However, if there is any emergency, the government may always consider help. But its stake in several PSBs are already over 80%, so at least these banks should first raise capital from the market,” he added.

Bankers say much depends on the Supreme Court verdict on potential relief on the waiver of interest on interest during the six-month repayment moratorium period. While the government has proposed to take on the liability of waiver of the compounding of interest for loans up to Rs 2 crore, sectors like real estate have told the apex court that they have essentially been left out of the relief measure. Any directive to banks to share the burden, along with the government, will further strain their finances and raise capital requirements, bankers fear.

Already, the SBI board in July planned to raise as much as Rs 25,000 crore this fiscal. Similarly, Bank of Baroda wants to raise Rs 13,500 crore, Punjab National Bank Rs 10,000 crore and Canara Bank Rs 8,000 crore. However, while larger lenders can raise resources, the smaller ones need the government help the most. Rating agency Icra has estimated that state-run banks need Rs 50,000-60,000 crore in capital even after the RBI breather on the one-time restructuring of loans.

The economy, which witnessed a record 23.9% slide year-on-year in the June quarter needs a massive credit push to get back on its feet, especially as lockdown-related curbs have been substantially eased now. PSBs have to shun risk aversion and do the heavy lifting, especially because shadow lenders’ ability to lend has been impaired by the crisis. Several agencies have forecast the GDP to contract by up to 15% in FY21. Although a rebound in growth is expected in FY22, analysts expect it to be mainly on the back of a favourable base.

In its Financial Stability Report, the RBI has forecast that gross non-performing assets (NPAs) may jump from 8.5% at the end of March 2020 to 12.5%, a 20-year peak, by March 2021. However, the NPA level may shoot to 14.7% by March 2021 in case of a severity of economic stress.

Having risen at a double-digit pace in FY19, the non-food credit growth started faltering since last fiscal. Non-food bank credit growth decelerated to 6% in August from 9.8% a year before, show the latest RBI data. Credit growth to industry slowed to just 0.5% in August from 3.9% a year earlier.

However, with the graded pick-up in manufacturing following the easing of lockdown measures, credit offtake is expected to pick up in the coming months. Banks have made progress in implementing some of the critical schemes of the schemes, announced in May as part of a Rs 21-lakh-crore relief package. For instance, as of September 29, banks had sanctioned loans of Rs 1.86 lakh crore under the Rs 3-lakh-crore credit guarantee scheme. Of this, as much as Rs 1.32 lakh crore had been disbursed, mainly to MSMEs.

Recapitalisation in recent years has been done mostly through bonds, which are typically off-Budget items. So there won’t be any immediate fiscal impact of such a move. However, these bonds add to the country’s debt burden and interest liabilities are met through Budgetary allocations.

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