The government on Monday sought Parliament’s approval to inject Rs 20,000 crore of equity capital in public sector banks (PSB).
The Union Budget 2020-21 did not make any allocation towards fund infusion in state-owned banks for this year, as banks were expected to raise capital from the equity markets. But with banks expected to record a spike in non-performing assets and higher loan losses in the wake of Covid-19, equity raising by PSBs from capital markets is now possible at low valuations. Government equity support will provide extra cushion and help the banks raise more funds from the markets.
According to the first batch of supplementary demands for grants 2020-21 tabled in Parliament on Monday, a total of Rs 20,000 crore has been sought “for meeting expenditure towards recapitalisation of public sector banks through issue of government securities”.
The government sought approval for a total additional spending of Rs 2,35,852 crore, which includes cash outgo of Rs 1,66,983 crore, while the rest will be met through savings of departments and ministries.
Apart from bank capital infusion, Rs 40,000 crore has been sought towards increased spending under Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and Rs 33,771.48 crore for direct benefit transfer under the Pradhan Mantri Jan Dhan Yojana and National Social Assistance Programme.
Approval for Rs 44,340 crore of spending has also been sought towards providing additional allocation under post devolution revenue deficit grant to states as per the 15th Finance Commission’s recommendations.
Government sources said bank wise equity infusion plan will be finalised after taking into account their internal assessment of the impact of Covid-19 related developments on their “balance sheets, liquidity profile, asset quality and profitability”.
The Reserve Bank of India has called for both private sector and public sector banks to raise equity to strengthen their balance sheets. A number of private banks have raised capital of over Rs 80,000 crore from equity markets since April.
“The current pandemic related shock is likely to place greater pressure on the balance sheets of banks, leading to erosion of their capital. Proactive building of buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system — resilience of individual banks and financial entities as well as resilience of the financial sector as a whole,” RBI Governor Shaktikanta Das had said last month.
In recent years, the government has significantly capitalised state-owned banks and pursued consolidation in the PSU banking space. In the last three financial years, the government has infused equity of Rs 2.65 lakh crore into state-owned banks. But the pandemic is expected to lead to a further surge in NPAs and erosion of capital, necessitating another round of capital raising by banks. Industry sources said Rs 20,000 crore of capital may not be enough for all PSBs and this equity may go to relatively weaker banks.
As per a recent assessment of an expert panel set up by the RBI, corporate sector debt adding up to Rs 15.52 lakh crore has come under stress following the pandemic. The KV Kamath committee, which worked out the financial parameters for a loan restructuring plan, has said that 72 per cent of the banking sector debt worth Rs 37.72 lakh crore remains under stress, which is almost 37 per cent of the total non-food bank credit.
Among other proposals to augment the health infrastructure, the government has sought Rs 14,231.96 crore, including Rs 5,915.49 crore, for meeting additional expenditure towards grants-in-aid general for containment of the pandemic and Rs 2,475 crore to the Indian Council of Medical Research. Approval for another Rs 10,000 crore has been sought to meet expenditure towards food subsidy under the National Food Security Act.
Rs 1,232 crore will be allocated to the Small Industries Development Bank of India on interest subvention of 2 per cent on prompt repayment of Shishu loans extended under the Pradhan Mantri Mudra Yojana. Another Rs 4,000 crore will be be provided to the National Credit Guarantee Trustee Company Limited for giving government-guaranteed collateral-free additional loans to MSMEs under the Rs 3 lakh crore of Emergency Credit Line Guarantee Scheme.
In May, Finance Minister Nirmala Sitharaman had announced a 65 per cent increase (Rs 40,000 crore) over the Budget outlay for MGNREGS in the fifth and final tranche of the AtmaNirbhar Bharat package. In the 2020-21 Budget estimate, the government had reduced the allocation under the scheme to Rs 61,500 crore, compared to the revised estimate of Rs 71,002 crore in 2019-20. The sharp hike came amid migrants going back to their hometowns after the nationwide lockdown, leading to a sharp surge in demand for NREGS work.
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