Covid-19 aftermath: Capital infusion into PSBs likely in next fiscal as well

Having risen at a double-digit pace in FY19, the non-food credit growth faltered this fiscal.

As lenders stare at massive losses, especially in the first half of FY21, due to the Covid-19 outbreak and a lockdown, the government is willing to infuse capital into public sector banks (PSBs) next fiscal to bolster their ability to lend, sources told FE.

Having extended Rs 70,000 crore to state-run banks (including IDBI Bank) in FY20 and as much as Rs 3.1 lakh crore in the past five years, the government has refrained from providing for more capital in the Budget for FY21. However, since recapitalisation can be done through bonds, which are typically off-Budget items, there won’t be any immediate fiscal impact of such a move.

Infusion will be critical, especially in the September and December quarters, when the impact of the pandemic would hopefully start to ebb and the economy would require a massive credit push to get back on its feet, bankers said. PSBs will have to do the heavy lifting, especially because shadow lenders’ ability to lend will be severely impaired by the crisis, they added.

“Yes, banks’ profitability will be under immense pressure and some recapitalisation may be required. The government stands ready for any move that will help the financial system as well as the broader economy,” a senior government official said.

The Covid-19 crisis and the prospect of a spike in bad loans come just when PSBs were assumed to have made significant progress in the long and difficult war against non-performing assets (NPAs). As many as 13 PSBs clocked profits in H1FY20, against just six a year before. The growth of gross NPA of state-run banks contracted by 7.9% year-on-year in the December quarter, against 7.1% a year earlier.

Commenting on the aftermath of the latest crisis, a senior executive with a Delhi-based bank said: “It’s not just about the duration of the pandemic anymore. The fragile demand situation even after the crisis is over, the potential failure of a large number of borrowers to repay loans (once the three-month moratorium is lifted) and the delay in the economic recovery will continue to strain banks’ balance sheets for a much longer period. The government and the banks have to get ready for that as well.”

The government also believes that the biggest consolidation exercise in the public-sector banking space—the amalgamation of 10 PSBs to create four larger lenders with scale – from April 1 will support the credit appetite of the economy in the coming quarters.

Having risen at a double-digit pace in FY19, the non-food credit growth faltered this fiscal. Even before the Covid-19 started to spread, non-food credit growth crashed to just 6.3% year-on-year in the fortnight ended February 14, the lowest since May 2017, mirroring a broader economic slowdown and risk aversion among bankers.

Similarly, loans to exporters continue to contract, although the central bank has now relaxed the priority-sector lending norms for exporters to ensure greater flow of credit to them.