Finance Minister (FM) Nirmala Sitharaman on Friday said the government will infuse Rs 70,000 crore in public sector banks upfront, possibly within the next week, and will fast-track clearance of government due to companies, something that can drastically reduce the bad debt in banks’ books and free up more capital.
The original plan was to infuse this money in three years.
The capital infusion, ahead of the festive season, will boost banks’ lending capacity by an additional Rs 5 trillion. The capital would also help banks boost their capital adequacy and make them more confident in resuming normal lending activities. With the capital support, banks under the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework could come out and resume their normal lending operations, experts said.
“Since the capital infusion of is upfront, a substantial part of it would be growth capital, which will enable banks to lend with greater confidence,” said R K Bakshi, a banking sector expert and former executive director of Bank of Baroda.
The auto sector many demand credit immediately, as the government also announced a slew of measures to boost sales. The FM said home and auto loans would be cheaper after banks linked their lending rate to repo.
Mumbai-based Union Bank of India immediately launched its “Repo Linked Lending Rate” (RLLR) for new home and vehicle loans. Borrowers with good credit score will get home loans from Rs 30 lakh to Rs 75 lakh at 8.25 per cent, 35 basis points lower than the existing rates.
Vehicle loans for such customers will be at 8.6 per cent, which is 40 basis points lower than existing rates. The bank will continue to offer existing home and auto loan products, too.
This may boost demand in the retail segment, but may not be much, say experts. Bankers have earlier cautioned that repo being a volatile rate can hit the customers quite negatively when they start rising. Marginal cost of funds-based lending rate, which is calculated based on incremental cost of funds, tend to be much more stable. Bankers and economists say it remains to be seen how much demand grows by the measures.
“The measures will boost consumption loans, and may not commercial loans. Unless the demand in real economy gets a boost, the multiplier effect doesn’t take place,” said an economist requesting anonymity.
Bankers were elated about the government’s promise to clear the dues in a time-bound manner.
“A large part of the non-performing assets (NPA) have accumulated because of the government not clearing dues. If that is cleared, these companies can become healthy again. Banks can proactively restructure these loans and forego some interest payment caused by the non-payment of government dues,” said a banker, adding once these companies get the money, they can further clear dues of smaller companies down the line and everyone can repay the banks.
The NPAs in the infrastructure space is more than 20 per cent, according to analysts. Most of it is caused by policy decisions, delayed environment clearances, and land acquisition hurdles, and delayed repayment of dues from the government.
Bankers said job losses would continue to keep consumer demand muted. The corporate sector may not come immediately to borrow from banks because there is excess capacity. But banks will no longer be reluctant to lend.