Budget: Economists expect Rs 40,000 crore capital infusion in banks to tackle bad loans

Due to the adverse economic impact of COVID-19 global pandemic, non-performing assets or bad loans of Indian banks are set to rise in the near future. Bankers and economists expect finance minister Nirmala Sitharaman to announce a Rs 35,000 to Rs 40,000 bank recapitalisation plan in the Union budget as the non-performing assets or bad loans are set to rise due to the economic slowdown, says Madan Sabnavis, Chief Economist of Care Ratings while speaking to Krishnanand Tripathi, Deputy News Editor of ETV Bharat.

New Delhi:Bankers and economists expect finance minister Nirmala Sitharaman to announce a Rs 35,000 to Rs 40,000 bank recapitalisation plan in the Union budget as the non-performing assets or bad loans are set to rise due to the economic slowdown caused by the COVID-19 global pandemic.

Indian economy is likely to shrink by nearly 8 per cent in the current fiscal according to the first advance estimate of GDP growth released by the government.

“In the budget, we are expecting a bank recapitalisation plan. We are looking at something in the size of Rs 35,000 to Rs 40,000 crores,” said Madan Sabnavis, Chief Economist of Care Ratings.

However, it is not yet clear, how the government will implement the bank recapitalisation plan. The government may announce direct budgetary support or can issue bonds to the banks to raise the capital.

“The mode of capitalisation will be interesting,” Sabnavis said in response to a question by ETV Bharat in a programme organised by policy think tank Egrow Foundation.

The economist said the finance minister may also announce setting up a bad bank in the budget to deal with the problem of rising bad loans.

A bad bank is a bank that will aggregate the non-performing assets of other banks. It will help the lender banks to clean up their balance sheets by transferring the non-performing assets to the proposed bad bank.

“This is something which is very much on the envelope,” Sabnavis told ETV Bharat.

Risk of bad loans

Sabnavis says due to the adverse economic impact of COVID-19 global pandemic, non-performing assets or bad loans of Indian banks are set to rise in the near future.

“In terms of NPAs, it is true that when the economy slows down then the NPAs tend to increase,” Sabnavis explained.

“Today, when NPAs are not showing an increase when the economy is slowing down, this is something, which raises the red flag as in future NPA levels may go up,” the economist added.

“There is a direct correlation,” he told ETV Bharat.

According to the Reserve Bank’s estimate, bad loans or non-performing assets may touch nearly 15% by September this year as Covid induced economic disruptions have devastated the businesses, particularly small and medium companies.

VG Kannan, former managing director of State Bank of India, says the problem of bad loans will linger for some time.

“NPAs are not going to go away,” he said in response to a question by ETV Bharat.