Government may inject Rs 19000 crore into Public Sector Banks

The Indian public sector banks are going through rough times as there is a continuous increase in the level of Non-performing Assets (NPAs). NPAs not only lead to fall in the profit margins of the bank, but also it generates a vicious cycle of effects on the sustainability and growth of the banking system. If it is not managed properly it could lead to bank failure and hurts the economy badly. Also there is a slow down in GDP growth and industrial output because of NPA. The rising NPAs have become a major concern for the Reserve Bank as well as the government. As per the reports, most of the restructured loans are from the corporate sector. The top 30 defaulters are sitting on bad loans of Rs 95122 crore, which is more than one-third of the gross NPAs of PSU banks at Rs 260531 crores as on December 2014.

To overcome the problems of public sector banks, Finance Secretary Rajiv Mehrishi announced that, the government would infuse Rs 19000 crore in banks this financial year. Also the amount could double in the next financial year. Reports suggest that it is a part of recommendations made by P J Nayak (former Axis Bank chairman) committee which was setup by RBI to review the governance of Board of Banks. It suggested to reduce government holding under 50 per cent and bringing banks under the sole regulation of RBI. When government shareholding is brought below 50 per cent, the remaining should be transferred to a bank investment company (BIC). BIC will act like a passive fund whose focus would be to ensure good returns on its investment.

According to ICRA, gross NPAs might rise to 5.9 per cent this financial year as compared to 4.4 per cent in 2014-15. Also, as per the estimation of finance ministry public sector banks will need almost Rs 2.4 lakh crore to meet the norms of Basel-III (it is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector). Earlier, the finance minister has given reassurance that the recapitalizing will be done over the next few months and he has also made a provision of Rs 8000 crore in the Budget. RBI also pointed out that the government has made some allocations but given allocation is not adequate and something drastic needs to be done to prevent a crisis.