Govt planning multiple funds to park stressed assets

Sinha says banking sector 'absolutely rock solid'

The government is planning a variety of funds, including the National Investment and Infrastructure Fund (NIIF) announced in the Budget, to park the bad assets of banks.

“We expect a variety of funds — stressed debt fund, special situations fund, and NIIF — to participate in equity investment in these stressed assets,” said Minister of State for Finance Jayant Sinha on Tuesday, on the sidelines of an annual seminar on corporate bonds organised by credit rating agency CRISIL.

On if such a fund could also involve State Bank of India, the country’s largest lender, he said the details of the funds were still being finalised. “So we expect there will be a vibrant market to be able to take over these assets, which are in need of equity capital right now, and to bring these back on to a high-quality operating performance path,” he said.

State-run banks had bled in the past two quarters as the Reserve Bank of India (RBI) told the lenders to unearth all the bad debts they had. While Punjab National Bank, Bank of Baroda showed record losses, State Bank of India’s profits plunged 66 per cent in the fourth quarter as the banks had to provide heavy provisions to take care of their bad debts.

Rating agency Fitch on Tuesday said Indian banks’ credit profiles were at risk as capital eroded due to heavy bad debts. “An inability to strengthen capital in a timely manner could have a potentially negative impact on the banks’ ability to achieve balance sheet stability, pursue credit growth and defend market share in the long term,” Fitch said, adding that the core capital ratios for many public sector banks were close to or below the regulatory minimum of eight per cent. The sector was “unlikely to build capital through internal capital generation in light of the dim earnings outlook, at least over the next two years due to the ongoing provisioning pressure,” it said.

However, speaking at the event, Sinha said the banking sector was “absolutely rock solid” and the government would support the public sector banks for whatever was needed.

Fitch said it would likely reassess its $140-billion (Rs 9.4 lakh crore, at an exchange rate of Rs 67.26) estimated capital need for the system under Basel-III, as bank losses in the second half of 2015-16 was more than double the government’s capital injection.

Asked about the prospects of another round of asset quality review, he said it was prudent for the regulator (RBI) to continuously conduct such exercises. On the pain for public sector bank at the end of 2015-16, he said the government and RBI had done an extensive assessment of stress earlier and estimated stressed assets to be around Rs 8 lakh crore, which still was the case.