After cleaning up the balance sheets of the State-run banks, the government has now provided additional capital to them to boost credit growth, apart from meeting regulatory requirements.
Announcing capital infusion, Union Finance Minister Nirmala Sitharaman said, “Public sector banks are now proposed to be further provided ₹70,000 crore capital to boost credit for a strong impetus to the economy.”
According to bankers, about 50% or ₹35,000 crore will be the growth capital after meeting regulatory requirements. The infusion is higher than what the market expected, around ₹50,000 crore.
“The boost for MSME, affordable housing & infrastructure sector is expected to generate the growth in the bank credit,” said Mrutyunjay Mahapatra, MD&CEO, Syndicate Bank.
Record recovery
Indicating the worst is behind for the banking sector, the Minister said the bad loans of the commercial banks had come down by over ₹1 lakh crore over the last year, and there was a record recovery of over ₹4 lakh crore due to the Insolvency and Bankruptcy Code. The provision coverage ratio is now at its highest in seven years, and domestic credit growth has risen to 13.8%, Ms. Sitharaman said, adding six public sector banks were out of the Prompt Corrective Action (PCA) framework of the RBI.
“The recapitalisation appears to be positive as it will not only address regulatory capital requirements but also the growth capital,” said Anil Gupta Sector Head - Financial Sector Ratings ICRA. Mr. Gupta said the infusion would help the remaining PSBs to exit the PCA framework and also facilitate merger among them.
“Further, in our view, the dependence on banks for raising capital from market sources also stands substantially reduced and the credit growth of 12-13% is assured, even if the PSBs are unable to raise capital from markets,” he added.
The long-awaited governance reforms in the PSBs seems to be on the cards as the Minister promised “reforms will also be undertaken to strengthen governance in PSBs”.
The Narendra Modi-led government, early in its first term (2014-2019) initiated governance reforms in the banks like splitting the Chairman and Managing Director’s post and forming a Banks Board Bureau (BBB) for board level appointments.
