DNA Money Edit: The cost of pulling banks out of NPA mess

The government's ambitious Rs 2.11 lakh crore recapitalisation plan will surely benefit the capital-starved public sector banks. It comes amidst a subdued 6.8% year-on-year credit growth of the banking sector as of September quarter, partially driven by weak capital position of the banks and their ability to lend. The lenders which saw their capital base shrink thanks to the ballooning non-performing assets have been desperately looking for capital to focus on business growth.

According to the finance minister, the government plans to fund Rs 1.35 lakh crore via recapitalisation bonds, while the remaining Rs 76,000 crore will flow in from the government's budgetary support. Since the amount is three times the Budget Estimate of Rs 25,000 crore, the government may be forced to look for additional revenues sources. It is likely that the government would get more aggressive on divestment and PSU dividends to meet the shortfall.

Many analysts had linked the absence of an investment cycle and the related lack of loan growth to the ongoing asset quality problem faced by the Indian banking industry. Surely, the recapitalisation bonds will be subscribed by the banks, which will see their investments and net worth improve. It is definitely a positive move for them. While soft oil prices remain a blessing for the government, digging deep into the Budget for recapitalising banks may not be an easy task.