Life Extension: Part of Rs 2.1L cr outlay announced in 2016 to refinance ailing units
To boost consumption demand in the economy, the government will provide Rs 70,000-crore capital support to public sector banks (PSBs).
The refinance will depend on the credit growth of banks. This is part of the Rs 2.11 lakh crore outlay that the government had announced in 2016 to recapitalise the banks. However, the finance minister did not announce any measures to ensure that indiscriminate lending is capped.
The recapitalisation will fund growth considering that most of the banks' capital reserves are strong and six banks have exited from prompt corrective action, which had restricted fresh lending for banks saddled with bad loans.
The finance minister said the banking system gained from the bankruptcy law. "Financial gains from cleaning of the banking system are clearly visible. NPAs reduced by over Rs 1 lakh crore last year. Smooth consolidation of banks was carried out and six PSBs were brought out of prompt corrective action (PCA) framework," she said.
"The higher-than-expected capital support to PSBs in FY20 reiterates GoI's intent to bring them out of PCA and also provide with growth capital," said Karthik Srinivasan, senior vice-president and group head, financial sector ratings, ICRA.
Sunil Sharma, chief investment officer, Sanctum Wealth Management, said, "The core problem remains unaddressed, which is of governance and ensuring that indiscriminate lending does not lead to a whole new set of NPAs a few years later. One can argue that some of the change in habits has been addressed via the NCLT and IBC route. Yet again, markets were expecting announcements of strategic divestment or privatisation sales, which would allow new management to come forward to manage the entity."
Another positive for the banks is the fall in yields. Abheek Barua, chief economist, HDFC Bank, said, "For the bond market, the new fiscal deficit target of 3.3% of GDP compared to the interim budget target of 3.4% should come as a positive surprise and lead to ease in yields. We expect the benchmark bond yield to remain below 7% this year, both on account of an unchanged borrowing number (Rs 7.1 trillion) and expectations of a sovereign India bond being introduced."
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