Budget unveils steps to relieve stress on banks

The government’s budget for the year 2016-17 is considered to be extremely critical for the banking industry, especially the public sector banks. The Reserve Bank of India (RBI) had conducted an asset-quality review across the banking sector and had asked banks to recognize visibly stressed assets as non-performing assets (NPAs) and make provisions for them.

In the light of such provisioning (which may not be for all NPAs, as provisioning was to be carried out over the two quarters ended in December 2015 and March 2016), 12 of the public sector banks posted losses in the December quarter. The gross value of their NPAs rose by ₹1.3 trillion (US$19.35 billion) in the three months ended 31 December to a total of ₹3.93 trillion.

Recapitalization

The budget re-emphasized the need for a strong and well-functioning banking system and stated that the government will continue supporting the banks. As part of a larger comprehensive Plan for Revamping of Public Sector Banks, dubbed Indradhanush, which was launched in 2015, the budget proposed an allocation of ₹250 billion in 2016-17 towards re-capitalization of public sector banks.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Sharmila Ratnam is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.