Centre may redraw bank recapitalisation plan in wake of new challenges

As India’s public sector banks stare at a fragile recovery in view of the recent Supreme Court ruling on interest on interest waiver and rising number of Covid-19 cases, the Finance Ministry is likely to revise its banks recapitalisation plan.

New Delhi: Amid rising number of fresh Covid-19 infections and the Supreme Court’s recent directive for banks to waive off interest on interest on loans above Rs 2 crore, the Central Government is likely to redraw the recapitalisation roadmap for public sector banks (PSB).

Quoting sources, news agency IANS Saturday reported that the finance ministry has already started a preliminary exercise to determine the capital requirement of PSBs in the current fiscal as the institutions face additional burden in wake of challenges that cropped up after the presentation of the Budget on February 1.

“The finance ministry has already started a preliminary exercise to determine the capital requirement of banks in wake of the changes in norms and rise in bad assets during the time of the pandemic,” said the IANS report.

Presenting her third Budget, Union Finance Minister Nirmala Sithraman announced that the government would infuse Rs 20,000 crore into PSBs in 2021-22 to meet regulatory norms.

However, this sum appears to be insufficient on the back of a Supreme Court order delivered last March.

According to the order, loans above Rs 2 crore were made eligible for interest on interest waiver in contrast to the government’s earlier directive that offered relief only for loans up to Rs 2 crore between March and August 2020.

According to IANS, this will put additional burden of close to Rs 7,500 crore on banks.

Similarly, Fitch Ratings on Friday said that the second wave of Covid-19 infections pose an increased risk to India’s banks.

"Over 80 per cent of the new infections are in six prominent states, which combined account for roughly 45 per cent of total banking sector loans. Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely."

According to Fitch, state-owned banks remain vulnerable as their prevailing weak asset quality and greater participation in relief measures are not commensurate with their limited loss-absorption buffers.

"The extension of the MSME refinancing scheme until 30 June 2021 will alleviate short-term pain, but potentially add to the sector's exposure to stressed MSMEs, which was around 8.5 per cent of loans,” Fitch estimated.

In a post-Budget interaction with ETV Bharat, expenditure secretary TV Somanathan said the Budget 2021-22 is based on the assumption that there will be no big recurrence of Covid-19 but if it happens due to new strains of Coronavirus then the government was better prepared to handle it.

Average daily fresh Covid-19 cases reached over 1 lakh this month from about 16,000 cases recorded in the first ten days of March.

In fact, India has added a whopping 1.45 lakh cases in the last 24 hours taking the total case load to over 1.32 crore.

According to the latest report by the Union Health Ministry, the number of active cases breached the 10-lakh mark again after nearly seven months.

(With Agency Inputs)