Centre will have to put more funds into public sector banks, says RBI

Public sector banks (PSBs) will need more capital infusion from the government for business growth and to meet regulatory norms and this must go hand in hand with their privatisation, the Reserve Bank of India (RBI) said.

In its assessment of Union Budget 2021-22, RBI said with PSBs accounting for a major share in advances made by scheduled commercial banks (SCBs) they might need to be recapitalised. This should be done to fund economic growth through improved credit offtake when demand picks up. Besides, recapitalisation and privatisation of PSBs must go together.

The Budget allocated Rs 20,000 crore towards recapitalisation of PSBs to help them consolidate their financial capacity. PSBs have proactively built buffers during financial year 2020-21 (FY21) to improve their resilience in the face of the shock from the pandemic. This must be continued into FY22 and some contribution towards this has come from the Budget, RBI said.

Strategic changes like the merger and amalgamation of PSBs undertaken since 2017 have resulted in seven large and five smaller PSBs. The measures (based on bad loans and regional factors) were intended to help manage capital more efficiently.

Governance reforms and action plans to enhance operational efficiency and customer services are integral for recapitalisation. In the context of mergers, it is also vital that the consolidated entity is well capitalised, RBI said.