The Indian Banking Industry has a crucial role in the economic development of the country. Let's discuss the impact of recent announcements made in Union Budget 2021 for recovery of banks, privatisatiation of some public sector banks and provisions made by government to recover banks from the risk of increasing NPAs post moratorium period.
A) Capital Infusion of ₹20,000 cr. In Public Sector Banks:
Just like the last 2 Financial Years FY19 and FY20, this year also there is capital infusion of ₹20,000 crore in Public Sector Banks by the government. Government and the financial ministry is extending their support to PSU Banks by this capital infusion, in the coming years as well, if the situation demands.
B) Proposal to Set up a Bad bank to Consolidate Stressed Assets:
What is Bad Bank?
Current Condition of Bad Assets:
What is the process:
What Will Asset Reconstruction Company Do:
Increasing Gross NPA of Banks (%)
C) Privatisation of 2 Public Sector Banks and Stake Sale in IDBI Bank:
The next big announcement is Privatization of 2 Public Sector Banks (Names not yet disclosed) and also stake sale in IDBI bank. Private investors are known to have 2 expertise, which are:
i) Financial Expertise: In comparison with PSU Banks, Private Sector Banks and NBFC have much control over the NPA’s figures. Few PSU Banks are having gross NPAs in the range of 20%-25%. Through the Privatisation of Banking sector, GoI is seeking financial expertise of private sector.
ii) Technological Expertise: Through this Privatisation, Government is seeking to achieve that technological expertise and technical know-how in the public sector banks.
PSU Banks considered for privatisation :
Punjab Sind Bank and Bank of Maharashtra are supposedly the two PSU banks that will be privatised
Possible reason for Privatisation of these banks:
i) Gross NPAs : Punjab & Sindh & Bank of Maharashtra currently have ~5.9% and 7.7% Gross NPAs as on Sept'20
ii) Both these banks were excluded from mergers last years and Government undertook Capital Infusion to the tune of ₹5,500 crore in Punjab and Sind Bank in FY21 and ₹7,800 crore in Bank of Maharashtra in FY18 & FY19.
D.Banks performance Post Announcement: