Union Budget 2021 commits bad bank, recap and PSB divestment

The Union Budget 2021-22 announced the long-overdue measure of setting up a bad bank for the stressed assets -- a move that brought a joyous cheer in the financial markets.

The Finance Minister said that an Asset Reconstruction Company and Asset Management Company would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realisation.

However, this bad bank is only there for public sector lenders. The government hasn’t however announced how much capital it would allocate towards bad bank -- demand for which has been long overdue.

Industry sources suggest that initial capital infusion towards the bad bank should be in the range of Rs 50,000 crore to Rs 1 lakh crore to have any meaningful impact.

Credit: DH.

India expects floodgates of bad loans to open up in the coming months, a move that is likely to impair the balance sheets of the banks. The stress tests conducted by the Reserve Bank indicate that the GNPA ratio of all scheduled commercial banks (SCBs) may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario.

If the macroeconomic environment worsens into a severe stress scenario, the ratio may escalate to 14.8%, according to RBI’s projections. Among the bank groups, public lenders’ GNPA ratio of 9.7% in September 2020 may increase to 16.2% by September 2021 under the baseline scenario.

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As the non-performing assets (NPAs) are set to bulge, the government has committed to further consolidate the financial capacity of PSBs, by further recapitalisation of Rs 20,000 crore.

But the most controversial part is the divestment of PSBs, which is already seeing resistance from public sector bank employees.

The government has proposed to take up the privatisation of two Public Sector Banks and one General Insurance company in the year 2021-22.

“This would require legislative amendments and I propose to introduce the amendments in this Session itself,” the Finance Minister said in her 110-minute budget speech.

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Firstly, the government needs to scrap the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969.

While this may clear the legal hurdle for the bank divestments, the road for bank divestments is still tough for the government. The PSBs have been burdened with huge NPAs, which would make it difficult to find suitors for them. Imagine this: of 13 PSBs, eight have a double-digit GNPA ratio, which is slated to double in the coming months.