Capitalise PSBs, create bad bank to absorb NPAs, says financial sector

The financial sector wants the Budget to capitalise public sector banks (PSBs) to support growth and form a bad bank to take over and turn around stressed assets.

Keeping an eye on economic revival, it should set up a development finance institution to provide long-term funding for infrastructure projects.

Rating agency CARE Ratings said, given that bank credit growth would be higher in FY22 than in FY21, incremental credit would be Rs 10-11 trillion. And with a share of 60-65 per cent in banking, PSBs can see an increase in credit of Rs 6.5-7 trillion. The need for capital from the government, through recap bonds or direct allocation, can be Rs 35,000-40,000 crore.

The financial strength of banks has been affected and further credit growth required for reviving the economy can be taken up by banks only after they get additional capital, said Jyoti Prakash Gada, managing director, Resurgent India.

A long-standing idea of a banking investment company (BIC) for government holding in PSBs also finds an echo.

Ramji Iyer, partner and national leader of financial services at Grant Thornton Bharat LLP, said the company structure to hold government stakes in PSBs would bring in transparency and better governance and ease fiscal pressure because the bank investment company would help raise capital.

Setting up a unit — a bad bank or an asset management company — to acquire stressed assets of banks, especially those of PSBs, has got traction. It has become important to free banks to focus on credit growth and build capacity to absorb slippages in the aftermath of the pandemic, PSB executives said.

The funding undertaken by the bad bank to resolve stressed assets should be linked to the credit ratings of the borrowing entities. This will help in providing a screening mechanism for picking up distressed assets by the bad bank, CARE Ratings said.

With economic revival becoming a priority, funding infrastructure projects is high on the agenda, Gada said.

To bring in additional resources, setting up a development financial institution may be required to support the “National Infrastructure Pipeline” of Rs 111 trillion.

Such an institution needs to be created in a way that their operations are ring-fenced and they function independently, India Ratings said.