Budget 2016: Higher recapitalisation must to reduce banking stress, say pros

The Union Budget 2016-17 will be tabled by the Finance Minister in Parliament on Monday. The public sector banking space, which has been plagued by the burden of stressed assets, hopes for some relief through capital infusion, higher than the earlier budgeted amount.

The government had announced capital infusion of Rs 70,000 crore into public sector banks over four years up to FY19, in four tranches of 25,000 crore each for FY16 and FY17 and Rs 10,000 crore each for the following two fiscals.

However, industry experts believe this will not suffice. Also, considering the balance sheet clean-up is stipulated to be completed by March 2017, they feel the government should also front-load the capital infusion process.

According to a pre-Budget note by Standard Chartered, the cleaning up of banks’ balance sheets by March 2017 has laid additional strain on government finances. "Given the push to clean up bank balance sheets sooner rather than later, we think the government is likely to increase its payout to public-sector banks to Rs 35000 crore (350 billion) this year from the original Rs 25000 crore (250 billion). This may increase the fiscal burden by 0.05 percent of GDP," the note said.

Ratings agency Moody's says there is little chance banks will access the capital markets in the near term to replenish their capital requirements. They will have to turn to the government for accelerated capital injections over the next 18 months. "Hence, unless the government revises upwards its capital infusion plan in the upcoming budget, there will be negative pressure on the credit profiles of these banks."Another likely outcome of the Budget on banking is a clear roadmap on bringing down the shareholding of Indian government in public banks to 51-52 percent, says a note by Karvy Stock Broking.