The Union Finance Ministry sought for the approval of Parliament to infuse Rs 20,000 crore into Public Sector Banks (PSBs) via recapitalisation bonds on Monday.

The step assumes to be significant as the capital infusion will be offering support to state-owned lenders to handle the country’s deepening coronavirus crisis, which has put borrowers under pressure, increasing the threat of higher non-performing assets (NPAs). However, the Capital infusion through recapitalisation bonds will not impact the fiscal deficit in the current financial year, as there is no cash outgo.

Finance Minister, Sitharaman tabled supplementary demand for the grants, which reflects additional expenses by other ministries on the amount allocated in the Budget and also indicates the spending appetite of the government. The Reserve Bank of India (RBI) has also called for the capital infusion into the banks, for helping banks to deal with the concerns of rising bad loans.

“Going forward, there are certain stress points in the financial system, which would require constant regulatory and policy attention to mitigate the risks. The economic impact of the pandemic – due to lock-down and anticipated post-lock-down compression in economic growth – may result in higher non-performing assets and capital erosion of banks. A recapitalisation plan for PSBs and private banks (PVBs) has, therefore, become necessary,” said RBI Governor, Shaktikanta Das in July.

The RBI had also said that the bad loans are expected to rise to a 20-year high of 12.5% of the total advances by March 2021 and warned that under the worsening economic conditions it might soar to 14.7%. While the 2020-21 budget did not set aside funds for capital infusion into the state-owned banks, the government had infused Rs 70,000 crore into the state-owned banks for boosting their growth capital.