Sources: India Needs To Inject $20 Billion Into Coronavirus-Hit State Banks

Sources: India Needs To Inject $20 Billion Into Coronavirus-Hit State Banks

Government and banking sources revealed that India might need to pump around $20 billion to its coronavirus struck state-owned banks. The sources claimed that the government initially planned to spend about 250 billion rupees for bank recapitalization, but the figure increased as they expect the pile of soured assets to double.

India’s financial condition is in grim condition

A government official familiar with the matter said that the budget increased as they expect loan defaults to rise. At the same time, businesses take a severe hit from the government’s novel coronavirus preventive protocols. The source commented that the current financial situation of the country is in a bleak situation.

The sources asked for anonymity because of the nature of the topics discussed. A source said that capital plans are being discussed, and people should expect the final decision in the second half of the fiscal year, which will return on April 1.

Government figures revealed that Indian banks are loaded with 9.35 trillion rupees of non-performing assets, equivalent to roughly 9.1% of their total assets in September 2019. Earlier this month, Reuters predicted that bad loans would reach 18-20% of total assets by the end of the fiscal year next March. The report said that 20-25% of India’s outstanding loans are at risk of default.

Several global rating agencies noted that the nationwide lockdown, extended to its third month, might lead to a contraction in economic growth in the current financial year, and the recovery of the economy will take a long time.

India should pump funds to financial institutions

A source said that the federal government should finance the whole capital injection, relying on indirect measures like recapitalization by issuing bonds. The source also said that the amount could also be partly funded through the monetization of the central bank’s fiscal deficit.

The bank source also revealed that officials of the finance ministry are in talks with the Reserve Bank of India (RBI). The bank, on the other hand, did not respond to the claim.

In the last five years, the federal government has already injected not less than 3.5 trillion rupees to keep the state-owned banks running. In the 2020-21 financial year, India did not include the capital injection in its federal budget, encouraged banks to reach out to capital markets to raise revenue.

A senior Indian banker said that the government wants banks to maintain at least 6-7 percent of lending growth for the current financial year to make the economy livelier despite the decline of new loans due to the pandemic. The source said that there would be a ripple effect of the slowing economy that banks will feel, and capital is needed to sustain and grow.

Every part of the world shares the same fate as India. Many banking systems around the globe hoped-for government support as assets devaluates and revenue falls. Without government support, financial institutions might struggle to recover while others might report bankruptcy. A stable banking institution might help India recover from the economic downpour the coronavirus brought.

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