The centre sought parliamentary nod on Monday to infuse Rs 20,000 crore worth of capital in public sector banks this financial year, which ends in March 2021. The move is aimed at supporting the lenders against a surge in bad loans projected by the Reserve Bank of India due to the coronavirus pandemic and related restrictions. The decision to recapitalise banks comes at a time when the country's banking sector, already reeling under low credit offtake and thousands of crores in frauds, is battered by the spread of COVID-19.
The government sought parliament approval for a total additional spending of Rs 2.35 lakh crore crore for the current financial year (2020-21), including a cash outgo of Rs 1.67 lakh crore, primarily to meet expenses for combating the coronavirus pandemic.
The government has directed banks and other financial institutions to roll out their loan resolution schemes for eligible accounts facing stress due to the pandemic, by September 15.
In its budget for 2020-21, it refrained from earmarking any capital in state-run banks in its Budget for 2020-21. The centre had proposed to infuse Rs 70,000 crore of capital into PSU banks in 2019-20 to boost credit and push economic growth.
Last week, Finance Minister Nirmala Sitharaman said banks are going to be the catalysts for economic revival, emphasising that all officials in the sector should know the details of government schemes which are to be implemented.
The fallout from the coronavirus pandemic is likely to inflate the ratio of gross non-performing assets - or bad loans - in the country's banking system to at least 12.5 per cent by March 2021, from 8.5 per cent in March 2020, according to a report by the RBI's Financial Stability and Development Council released in June.
The government has already pumped in Rs 3.5 lakh crore in the last five years to support state-run banks. It has already brought down the number of state-run lenders to strengthen the ailing sector.
This year, a mega merger plan to combine 10 state-run lenders into four came into effect, as part of the government's ambition to make India a $5-trillion economy by 2025.
However, the country's GDP shrank a record 23.9 per cent in the quarter ended June 30, as the coronavirus pandemic crushed demand in an already-slowing economy, pushing it off track from those ambitions.