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Under-capitalised banks may resort to zombie lending, hurt real economy: Economic Survey 2021

PSBs will require Rs 2 lakh crore over the next two years, as per rating agency Moody’s estimates.

January 29, 2021 / 03:56 PM IST
Representative image (PC- MoneyControl.Com)

Representative image (PC- MoneyControl.Com)

The Economic Survey 2021, released on January 29 ahead of Budget 2021, has called for adequate capitalisation of public sector banks. If capital is not provided, lenders may resort to risk-shifting, it said. In turn, impacting the real economic recovery.

“Under-capitalised banks may again resort to risk-shifting and zombie lending, thereby severely exacerbating the problem,” the survey said.

“The adverse impact could then spill over to the real economy through good borrowers and projects being denied credit. The resultant drop in the investment rate of the economy could then lead to the slowdown of economic growth,” the survey said.

This warning is significant since the credit growth has plunged to record low levels in the recent months on account of a range of factors including general economic slowdown and muted demand. Also, banks have been highly risk averse to lend to smaller firms due to high risk perception.