CARE Ratings to government: From where will you get the recap funds for PSBs?

Credit ratings agency CARE raising its eyebrows, asked the government – from where it (the union government) intends to bring the funds for the recapitalisation of public sector banks (PSBs). The 1993 founded credit rating agency said the funds might come from the interim dividend declared a few days back by the RBI or from RBI’s reserves, the Financial Express reported.

The union government on Wednesday declared an infusion amount of Rs 48,239 crore for recapitalisation of PSBs. The initiative will enhance the financial performance of the commercial banks, and will assist them to cope with RBI’s prompt corrective action (PCA) plan.

“No such provision for recapitalization was made in the Budget 2019-20, therefore it is not clear if the recapitalization will happen this year or in FY20,” the rating agency told the Financial Express.

The report states, the PSBs distribute the burden of non performing assets amongst them unequally. Recapitalisation of the PSBS would increase fresh credit, and hence will aid in credit growth, especially for the micro small medium scale enterprises (MSMEs), FICCI-IBA Bankers’ Survey stated previously.

Finance Minister Arun Jaitley in the year 2017 guaranteed a recapitalisation of Rs 2.11 lakh crore for the PSBs, of which, Rs 88,139 crore was infused in FY18. Before December 2018, the government provided a recapitalisation amount of Rs 1,57,476 lakh crore, counting in the amount infused in previous FY18.

Since the recapitalisation announcement till November 2018, PSBs were recapitalised to the tune of Rs. 1,28,861. Further, the centre infused Rs 28,615 crore into seven PSU banks in December last year.

The Financial Express reported, after the government announced the total amount allocated for recapitalisation, until November 2018, an amount of Rs 1,28,861 was allocated for recapitalisation, was used by the PSBs. The government also infused Rs 28,615 crore for recapitalising seven PSBs in December 2018.

Former Chief Economic Advisor Arvind Subramanian had already stated that under IMF accounting, it does not include the fiscal deficit; in any case, under India’s accounting, it does, as the government would be liable to pay the interest and confront value of the bonds.

However, being a long-term debt, it gives time to banks to improve their balance sheets by raising their credit and private investment. With the banks’ circumstance improvement, the government can at that point retire the debt from the proceeds by offering the bank equities which it purchased earlier, reported the Financial Express.

(With agency inputs)