timely aid

Source: The Hitavada      Date: 28 Nov 2018 12:32:57

WITH the Central Government deciding to infuse Rs. 42,000 crore in public sector banks (PSUs) by March end, the stressed banking system in the public sector can hope to breathe somewhat freely, with the next tranche of aid likely to be released early next month. This is in addition to the Rs. 11,336 crore allocated to major PSUs earlier this year. This is in keeping with the promise the Finance Minister had made in his budget speech and also in accordance with the recapitalisation programme worth Rs. 2.11 crore it had announced in October last year. The Government has infused this capital through issue of bonds and has allowed banks to raise capital from market. 


Such a massive recapitalisation had become necessary due to enormous debt default by borrowers, mounting Non-Performing Assets (NPA) and huge frauds committed by some of the corporate houses. As a result, public sector banks were thrown into turmoil, needing Government’s helping hand urgently. Such helping hand had also become necessary to spur investment but banks were in no position to provide funds. When Government was expecting a turn-around in the country’s economic activity with the growth rate picking up slowly but steadily, the crisis in the banking sector threatened to put brakes on growth.

The Government had undertaken massive development projects for which investment mostly came from the Government side. The Government was keen on investment to generate in the private sector. But the private sector, in turn was, largely dependent on public sector commercial banks. However, no help was possible from the public sector banks due to their precarious financial condition. There was no alternative for the Government but to assure help to the PSBs on an urgent basis.

Since the last couple of years the Government has been infusing capital in public sector banks by making budgetary provisions. But this was not enough to fill the vacuum that had been created in public sector banks’ finances due to mounting NPAs. While the Government was committed to complete its infrastructure development and earmark huge funds for them, it was also saddled with the responsibility of infusing massive funds in the stressed public sector banks. Besides the Government is looking at a possible shortfall in collection of indirect tax revenue through Goods and Services Tax (GST). That also adds to the worry of the Government. This threatened the fiscal deficit to overshoot its targeted level. It was this situation that prompted the Government to seek the surplus funds that the Reserve Bank of India (RBI) has built up over time.

The Government is well within its right to seek such window from the apex bank. According a recent report by the analysts of Bank of America and Merrill Lynch, the Reserve Bank of India is in a position to transfer Rs. 1 trillion excess reserves to the Government and even go upto Rs. 3 trillion without compromising on its statutory contingency reserve ratio. Already the Board of Directors of RBI is in the process of appointing a committee of experts to study the proposal. If the committee gives a positive nod, then Finance Minister Mr. Arun Jaitley’s suggestion some time back would come to fruition and much of the Government’s financial worry would be taken care of.

The Government has taken various measures for ensuring ease of doing business and this has also been acknowledged by International Monetary Fund, World Bank and other agencies, besides the corporate sector. All these agencies are convinced about India’s robust growth potential. But the only hitch is that public sector banks need to resume their lending business. The MSME sector, which is a major job generator, particularly, is in dire need of financial help.