July 7, 2017
In order to deal with the menace of bad loans, the central government will most likely infuse more money into Public Sector Banks (PSBs). A senior official of the finance ministry told the Economic Times that the exact amount will be decided once the Q1 results of PSBs are available.
The Reserve Bank of India (RBI) has estimated that in FY 2017-18, PSBs will require capital infusion of around Rs.48,000 crore, more than 5 times the amount allocated at present by the government. However, RBI also provided another estimate of Rs.30,000 as capital requirement of PSBs for the current fiscal year. The ministry of finance will take a call of the actual amount to be infused.
The government of India introduced the Insolvency and Bankruptcy Code (IBC), the bankruptcy law of India, to deal with bad loans. The law empowers banks to take quicker actions and resolve nonperforming assets (NPAs). The RBI identified 12 accounts that accounted for more than 25% of the total NPAs of Public Sector Banks. These accounts have more than Rs.5,000 crore of outstanding debt and they have been referred for immediate resolution under IBC.
Bad loans have affected India’s economic growth as they account for more than 5% of our GDP. By infusing more money into the PSBs, the government can help the PSBs deal with bad loans eroding their profits and meet Basel III capital adequacy requirements.