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COVID-19 impact | BFSI sector at an inflection point

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The COVID-19 disruption has brought a fresh slew of challenges for the banking and financial services sector. Over the last two years, BFSI was impacted by the sub optimal GDP growth followed by the liquidity crisis. The ongoing COVID pandemic has fanned expected decline in credit growth due to the overall economic slowdown, lockdown impact on income profile, asset quality deterioration in the medium term and increase in credit costs impacting earnings.

In the NBFC space, many business models require a complete re-look. Since cash collections were almost impossible at the beginning of the lock-down, disbursements also took a huge hit. Fear of job losses, damage to certain segments viz. tourism, recreation and related industries etc., added to asset quality woes. However, fiscal support from the government to the affected workers/businesses has offset some of the damages.

To contain the decline in growth and mitigate the adverse impact, the Government had stepped up initiatives with Rs 21 lakh crore economic package, which included RBI’s Rs 8 lakh crore worth of liquidity measures. Unveiled in five tranches, this included Rs 3.70 lakh crore support for MSMEs, Rs 75,000 crore for NBFCs and Rs 90,000 crore for power distribution companies, increased allocation for MGNREGS, tax relief to certain sections among the various measures announced. These steps though positive, addressed more of the supply side concerns while the demand side still requires attention. RBI has taken significant measures to improve liquidity, but risk aversion has ensured that financial conditions have remained tight.

There are, however, silver linings which have emerged. After demonetisation in 2016, this is the second major push towards digitisation of payment habits in India. While most banks have already moved towards technology in a big way in the past few years, the COVID-19 pandemic has forced people to stay indoors and move towards digital money payments. This will not only help in easing in newer transacting avenues but also lead the industry towards a leaner cost efficient structure.

In the current risk-off environment where valuations are getting cheaper, capital and liquidity are important and the ability of banks to not only withstand near term stress but also the follow-on impact of this funding and demand shortage will be key to watch. In this context, banks with a combination of comfortable funding, high provision coverage, limited issues in asset quality and excess capital are better placed to withstand current stress.

Retail sector viz. mortgages/ autos/ unsecured credit is likely to slowly gather pace once situation eases, given low underlying leverage with Indian consumers, easy access to credit and release of pent-up demand. A one-time loan restructuring relief will go a long way towards ensuring credit availability in this segment is not hampered. However, problems in MSME that Covid-19 imposes could take time to resolve, though the government measures will cushion some of the impacts. The MSME industry has faced headwinds from 2016 via demonetization, GST implementation and 2018 liquidity crisis to name a few. COVID-19 will add further stress to this sector, as many of these are in supply chains of larger corporations.

But the underlying important question is which sector will be amongst the first to bounce back when the economy normalises. Since financials are a proxy to a country’s economic growth, they will have to be among the first movers. In the past few years, we witnessed the listing of insurance, asset management companies which reflect the widening of the financial space in the country. The target of a $5 trillion economy cannot be achieved without a robust banking and financial services system and the present economic environment could provide the 'window of opportunity', albeit with caution.

Government scheme loans have higher NPAs, corporate loans 'under control', says SBI chief Rajnish Kumar

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Small-ticket government scheme loans have a higher number of bad loans than corporate loans, State Bank of India (SBI) Chairman Rajnish Kumar said,

Speaking at the Bharat Chamber of Commerce’s e-session on the banking system, he said corporate bad loans are now "under control"

“NPAs in Kisan Credit Card (KCC) loans are at par with Mudra loans. In Mudra loans, the gross NPA was close to 15 percent. However, with a new digital model in place, NPAs stood at close to 10 per cent," he pointed out.

Singh also spoke about loan moratoriums, noting that enthusiasm for the scheme was subdued as borrowers feared "cost implications" and "increased liability" at this point of time.

Commenting on loans disbursed to medium, small and micro enterprises (MSMEs), Singh said SBI has over the past 15 days disbursed 60 percent of the loans sanctioned to 2 lakh MSMEs, adding: “Our data analysis shows that MSMEs are managing this crisis very well.”

He also noted that businesses are "near to normal" after Unlock 1.0 – operating at 75-85 percent capacity and some industries also experiencing growth in exports.

"But more investment in the infrastructure sector was needed for growth to come back. Sectors like aviation, tourism and hospitality remained under stress," he said.

He added that while the Centre's fiscal stimulus package has created a "favourable investment environment", recovery has been slow. He added that when investment in roads and renewable energy picks up growth would "come back to growth quickly".

Government scheme loans have higher NPAs, corporate loans 'under control', says SBI chief Rajnish Kumar

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Small-ticket government scheme loans have a higher number of bad loans than corporate loans, State Bank of India (SBI) Chairman Rajnish Kumar said,

Speaking at the Bharat Chamber of Commerce’s e-session on the banking system, he said corporate bad loans are now "under control"

“NPAs in Kisan Credit Card (KCC) loans are at par with Mudra loans. In Mudra loans, the gross NPA was close to 15 percent. However, with a new digital model in place, NPAs stood at close to 10 per cent," he pointed out.

Singh also spoke about loan moratoriums, noting that enthusiasm for the scheme was subdued as borrowers feared "cost implications" and "increased liability" at this point of time.

Commenting on loans disbursed to medium, small and micro enterprises (MSMEs), Singh said SBI has over the past 15 days disbursed 60 percent of the loans sanctioned to 2 lakh MSMEs, adding: “Our data analysis shows that MSMEs are managing this crisis very well.”

He also noted that businesses are "near to normal" after Unlock 1.0 – operating at 75-85 percent capacity and some industries also experiencing growth in exports.

"But more investment in the infrastructure sector was needed for growth to come back. Sectors like aviation, tourism and hospitality remained under stress," he said.

He added that while the Centre's fiscal stimulus package has created a "favourable investment environment", recovery has been slow. He added that when investment in roads and renewable energy picks up growth would "come back to growth quickly".

Rs 3 lakh crore MSME loan scheme: PSBs struggle to improve actual disbursals; will private banks come on board?

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A month after Union Finance Minister Nirmala Sitharaman launched the mega Rs 3 lakh crore loan scheme for micro, small and medium enterprises (MSMEs), the response remain muted. There is a significant difference between amount sanctioned and the actual amount disbursed so far.

In fact, on a cumulative basis, only half of the amount sanctioned is disbursed till 16 June. PSB bankers are now on an overdrive to make the scheme work under directions of the government. However, low demand scenario is limiting the actual disbursals. Banks are also concerned about the likelihood of these loans going bad in a slowing economy.

Under the scheme, existing MSME borrowers of PSBs can get additional funds of upto 20 percent of their loan outstanding as on February 29. Government will provide complete guarantee to banks on these loans including the interest amount. This was announced as part of the Rs 20 lakh crore economic package to fight Covid-19 induced economic slowdown.

State-run banks, which are under heavy pressure to disburse loans, have disbursed Rs18, 306 crore against the sanctioned amount of Rs36,486 crore till 16 June. The sanctioned amount is about 12 percent of the total scheme mount (Rs 3 lakh crore) and the disbursed amount, roughly about 6 percent. “What is working against the scheme is the poor demand scenario. Why would companies borrow now if there is no business?,” said a banker on condition of anonymity.

Who gave how much?

Among the public sector banks, State Bank of India (SBI), country’s top lender by assets, has done maximum cumulative sanctions till June 16, at Rs 15,317 crore. Against this, the bank has disbursed Rs9,489 crore loans. SBI has disbursed this amount to 91690 accounts. The next big sanction amount is from Bank of Baroda, which has sanctioned Rs4,560 crore loans of which Rs1,255 crore is disbursed. Canara Bank has cumulatively sanctioned Rs3,683 crore loans of which disbursed amount is Rs1,619 crore loans. Punjab National Bank has cumulatively sanctioned Rs 3371 crore loans of which Rs1187 crore has been disbursed.

Except these banks, all other PSBs have sanctioned less than Rs 3000 crore and, logically, disbursed even lesser amount. The lowest cumulative sanction figure is by Punjab and Sind Bank at Rs 200 crore, which so far disbursed Rs 157 crore. Among the states, the highest amount disbursed is in Tamil Nadu--around Rs 2251 crore against total sanctions of Rs 3616 crore. The lowest is in Lakshadweep, at Rs25 lakhs against sanctions of Rs41 lakhs.

Private banks not on board yet

The MSME loan scheme was originally meant for PSBs. However, the government now wants private sector banks too to come on board. These lenders are yet to come on to the picture. Recently during a review of the scheme, the finance ministry is reportedly asked bankers on the possibility of participating private banks in the scheme.

Some of the larger lenders like HDFC Bank and ICICI Bank has exposure to MSME clients and small businesses. However, private banks are generally not keen to push loans aggressively to MSMEs at this stage since they don’t see viability in the present scenario.

“This is a good business, no doubt. But here also the problem is the demand,” said a official with a private bank. “Right now, there is no activity outside. Very difficult to push loans unless there are quality borrowers come to us for capital,” said the banker who didn’t want to be named.

Scheme turning to a loan mela?

However, for public sector banks do not have the luxury not to lend under a government scheme. According to senior bankers and industry officials, banks are on an overdrive to push the scheme. Officers are told to get maximum number of loan sanctions done from all eligible borrowers even though many of these sanctions do not translate into actual sanctions.

Banks are, hence, making phone calls to all MSME borrowers and offering loans under pressure from the top management. Some banks have a system of pre-sanctioned loans as well. This is despite the worry that many of these loans may not come back. Companies are not yet back on track after the prolonged lockdown since there is no demand for non-essential goods yet. Absence of workforce is also creating problems for MSMEs and SMEs (small and medium enterprises) to get back to normal activity.

“Private banks will be very cautious in lending to MSMEs even if they are asked to because there is very less demand for working capital. These banks will have to answer their shareholders about their credit decisions later,” said Siddarth Purohit, analyst at SMC Global Securities.

Some banks are also encouraging customers to use the scheme to pay up earlier dues. This would mean that customers are not getting any fresh money in hand to revive their business. Also, the 20 percent limit is a constraint to borrow enough money to meet their business needs. Small MSMEs typically borrow Rs 2-Rs 10 lakhs. If the borrower outstanding amount as on February 29 is too low, then the eligible amount will not be enough to meet their business needs.

Andhra Pradesh govt presents Rs 2.24 lakh crore budget for FY 2020-21

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The Andhra Pradesh government on Tuesday presented a Rs 2.24 lakh crore budget for the financial year 2020-21, a decrease of 1.4 percent over last year, with an estimated revenue deficit of Rs 18,434 crore and fiscal deficit of a whopping Rs 48,295 crore.

Finance Minister Buggana Rajendranath presented the Budget estimates in the Legislative Assembly on the first day of the brief budget session.

The 1.4 percent decrease in the budget estimates was on account of major economic slowdown during the COVID-19 pandemic, the Finance Minister said.

The state's debt burden increased to Rs 3.02 lakh crore at the end of March 2020, up from Rs 2.59 lakh crore a year ago.

In the 2020-21 fiscal, the state's debt is further estimated to shoot up to Rs 3.48 lakh crore.

The state's revenue shortfall was a staggering Rs 68,000 crore as the revised estimates for 2019-20 showed receipts of only Rs 1.10 lakh crore as against the estimated Rs 1.78 lakh crore.

However, the Finance Minister projected a revenue of Rs 1.61 lakh crore in the 2020-21 fiscal.

He proposed an overall expenditure of Rs 2.24 lakh crore during 2020-21, with revenue expenditure alone estimated at Rs 1.80 lakh crore and capital expenditure, including loan repayments, at around Rs 44,396 crore.

"There is nothing more important to this government than the comprehensive development of AP and its positioning at the very top in terms of human development. It is the constant endeavour of our government to not just live up to the expectations of people but outgrow them by bridging the gulf between lost opportunities of the past and promises of the future," he added.

India's forex reserves cross $500 billion-mark

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India’s forex reserves have now crossed the $ 500 billion mark in the week ended June 12. According to the data released by the Reserve Bank of India (RBI), the reserves reached $ 501.7 billion, marking an increase of $ 8.22 billion in a week. Reserves had surged $3.43 billion to a fresh all-time high of $493.48 billion in the week-ended May 29.

What is its significance?

Adequate forex reserves are key for a healthy economy. It gives the much needed cushion to the economy in the event of an economic crisis to support the imports. India, at one point, had weak forex cover. In 1991, the country had to pledge gold to raise money. At the current level, India has enough reserves to cover imports of over a year.

What are the components of forex reserves?

Forex reserves consist of foreign currency assets, gold reserves, special drawing rights and reserves in IMF. Of these, foreign currency assets are the biggest component followed by gold.

What is the use of forex reserves for RBI?

RBI, time to time, intervenes in forex markets to balance the volatility in currency markets. It either buys dollars to release rupee into the market or sell dollars to support rupee. Also, as mentioned earlier, forex reserves are handy if the economy plunges into a crisis.

What is supporting the forex reserves despite the economic slump?

According to rating agency CARE, forex reserves continue to register higher levels every week reflecting the strong external situation of the economy due to lower trade deficit and higher capital inflows on account of foreign investment. ECB registrations too have been higher during this period due to the favourable interest rate differential as well as stable rupee. Strong inward investments in the form of portfolio investments and rise in foreign currency assets have supported forex reserves.

Is there any other way India can use forex reserves?

There have been opinions that India should use its forex reserves for infrastructure financing. Some experts have opined that the country doesn’t need to keep high level of forex reserves idle but can use part of it for other development activities, mainly to give a push to infrastructure. But not all experts agree on this point.

Bharatmala Pariyojana to get delayed by 4 years: ICRA

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The first phase of the ambitious Bharatmala Pariyojana (BMP) that was scheduled for completion in 2021-22 is now likely to get completed by 2025-26, rating agency ICRA said on Wednesday.

Till February 2020, a total of 246 road projects with an aggregate length of about 10,100 km were awarded under BMP Phase-I at a total cost of Rs 2.38 lakh crore.

"The Bharatmala Pariyojana (BMP) Phase–I is likely to be delayed by four years and get completed by FY2026 instead of earlier envisaged FY2022," ICRA said.

Saying that till February projects worth Rs 2.38 lakh crore were awarded under BMP Phase-I, ICRA said the average cost of award stood at Rs 23.80 crore per km, which is 54 percent higher than initial estimated cost of Rs 15.52 crore per km.

The land acquisition cost for NHAI, it said, increased at a CAGR of 27 percent from FY2007 to FY2019 from Rs 0.21 crore per hectare to around Rs 4 crore per hectare.

This along with prudent bidding by developers at a premium when compared to NHAI's base price has resulted in significantly higher awarded cost for BMP Phase-I when compared to initial estimates.

Further as per ICRA's estimates, the prevailing uncertainty due to COVID-19 and the consequent impact on valuations could delay asset monetisation plan of NHAI through toll-operate-transfer (TOT) auctions and launch of infrastructure investment trust (InvIT).

Depending on how quickly the normalcy is restored, these plans could take off by end of FY2021. Therefore, 2020 is likely to be another year of muted awards.

Shubham Jain, Senior Vice President, Corporate Ratings, ICRA said, "As on March 2020, 16,219 km of BMP (around 47 percent of BMP) was pending to be awarded. We expect the awards to remain in the range of 3,000-3,200 km in FY2021 and increase thereafter once NHAI completes its proposed fund raising through infrastructure investment trust.

"With pick up in awards starting FY2022, the Bharatmala awarding activity is expected to get completed by FY2023 only," he added.

The Cabinet Committee on Economic Affairs (CCEA) approved the BMP Phase-I along with other programmes on October 24, 2017.

A total of around 34,800 km roads are being considered in BMP Phase-I, which also includes 10,000 km of balance road works under NHDP.

Estimated outlay for BMP Phase-I was Rs 5.35 lakh crore spread over five years between 2017-2022, as per the initial plan.

As per the revised funding plan dated September 2019, the dependence on market borrowings for BMP increased substantially by 72 percent to Rs 3.59 lakh crore, while the budgetary allocations and contribution from central road and infrastructure fund were reduced by 46 percent to Rs 1.83 lakh crore.

Consequently, borrowings of NHAI are expected to increase significantly and peak by FY2023 or FY2024; at the same time, NHAI's asset monetisation also remains critical to meet the funding requirements of BMP Phase-I, ICRA said.

"About 21 percent of BMP execution is completed as on March 31, 2020. Given the limited labour availability and productivity loss due to COVID-19, ICRA expects the pace of execution for FY2021 to remain low at 3,104 km and thereafter witness an increase by 10-15 percent in FY2022 before peaking in FY2024. The pending works are expected to be completed by FY2026," Jain said.

Unlock 1.0 rules for Andhra Pradesh: What is allowed, what is not

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The Centre has extended Lockdown 5.0 till June 30 and stated that Unlock 1.0 will be undertaken in phases through the month to slowly revive economic activity after the prolonged shut down since March 25 due to coronavirus pandemic.

Particulars of the easing have been left up to the states, especially in containment zones. Here are the details for Andhra Pradesh:

> Lockdown in containment zones extended till June 30

> Phased re-opening or Unlock 1 in non-containment zones to be done as per MHA guidelines

> Fines to be imposed for spitting in public spaces

> Wearing of mask and social distancing made mandatory in public spaces

> Unlock 1: Places of worship, hotels and restaurants re-opened from June 8

> Unlock 1: Hospitality services and shopping malls also re-opened from June 8

> Plans for Phase II: Decision on re-opening educational institutes to be taken in July

> Plans for Phase II: Secondary School Certification (SSC) exams or 10th board exams to be held from July 10

> Plan for Phase III: International air travel, theatres, gymnasiums, swimming pools, entertainment parks, bars, auditoriums, assembly halls, and social, political, sports, entertainment, academic, cultural and religious functions may be allowed after assessment

> Trains, flights and bus services resume – all passengers to be screened, must enrol to Spandana portal, exemptions in case of death of relative, for medical professionals and other officials

> Restrictions on inter-state transport to continue, symptomatic travellers from Delhi, Madhya Pradesh, Rajasthan, Gujarat, Maharashtra and Chennai to be quarantined for seven days and tested again; asymptomatic travellers to be quarantined in native districts and tested after seven days. Those testing positive to be moved to COVID-19 hospitals

> Those above 60 years and below 10 years of age, pregnant, lactating and terminally ill to be home quarantined. Daily visits by ASHA workers.

National Pension System: Here are seven reasons why this savings instrument stands out

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The National Pension System (NPS) is a voluntary-defined contribution pension system in India. NPS like PPF and EPF, is an EEE (Exempt-Exempt-Exempt) instrument in India.

It is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Here are the 7 benefits of National Pension System (NPS)

Flexibility: Subscribers has control over the choice of asset class (Active or Auto choice) and the Pension Fund Managers (PFMs) or Pension Funds who manages the investments. Subscribers can switch the Pension Fund once in year and the investment option or asset class twice in a year.

Dual benefit of Low Cost and Power of compounding: NPS carries the benefit of being the lowest cost pension product in the world. The overall costs in NPS are the lowest due to economies of scale in operations of the system architecture.

Also, accumulation of the retirement corpus over a period of time gets accelerated on account of the compounding effect and nominal charges borne by the subscriber.

Tax benefits:

(a) On subscriber’s contribution: Own contributions are eligible for tax deduction u/s 80 CCD (1) upto 10% of basic + DA or up to 20% of Gross Income for self-employed within the overall ceiling of Rs. 1.50 Lacs u/s 80 CCE


(b) On employer’s contribution: Contributions made by employer are allowed as deduction u/s 80CCD(2) while computing total income of the employee. However, the amount of deduction is restricted to 14% of salary in case of Central Govt. employees and 10% in any other employees (otherwise 20% of gross total income).


NPS provides additional tax benefit u/s 80CCD 1(B) on contribution in NPS account subject to a maximum investment of Rs 50,000. Thus, investing in NPS, a subscriber can get a tax benefit of Rs 2 lakh (1,50,000+50,000).


Safety (Regulated & Monitored): NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which is established through a statute. PFRDA prescribes the investment norms and monitors the performance of the entire system.


Simple and transparent: NPS is simple to open and operate. A subscriber can open an account with any one of the Point of Presence or through eNPS and get a Permanent Retirement Account Number (PRAN).

 Portable: The NPS account (PRAN) is unique and the subscriber can transfer the pension account across employment and locations while changing his/her employer or on relocation.


Online Access: Subscriber can access and operate the pension account online through web based interface or through the mobile application.

Why RBI policy is now a non-event for the common man

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A closer look at the minutes of the monetary policy committee (MPC) released on Friday shows deepening worries among the members about the lack of monetary policy transmission in the banking system, which makes the monetary policy ineffective.

“For monetary policy actions to transmit fully to the credit market, it is important that banks remain well capitalised. Only banks with strong balance sheets could be expected to support lending activity as and when credit demand picks up,” said Janak Raj, one of the MPC panel members.

India’s banking system is dominated by state-run banks which control 60 percent of the assets. Government, the majority stakeholder in these banks, has not allocated any capital this fiscal year for these banks. Banks require capital mainly for two reasons.

To set aside money against risky loans (provisions) and to lend afresh. Chetan Ghate, another MPC member, too has clearly said that rate cuts do not work unless banks restart lending.

“For rate cuts to work, banks have to lend. Despite the large number of steps taken to improve the liquidity and functioning of credit markets, as of April 24 (the most recent data available), non-food credit growth on a y-o-y basis was at 6.5 percent on May 8, 2020, lower than 7.2 per cent on April 10, 2020,” Ghate said.

In effect, the MPC members have sent a clear signal to the government on the recapitalisation issue of PSBs.

Capital is not the only worry. Lack of demand on the ground is a bigger problem. Companies do not have the confidence to borrow more in a scenario where consumer demand is low.

The recent RBI consumer surveys point to a sharp fall in consumer sentiments. How can the demand situation improve? Monetary policy has only limited tools available to address the demand problem. Economists, for long, have pointed out that fiscal measures should be aimed at demand creation on the ground. This is absent so far.

Warning on growth situation

Lack of monetary transmission is a bigger worry in the context of sharp slowdown in economic growth. The RBI top brass has used strong words to describe the growth situation. For instance, governor Shaktikanta Das said the growth outlook has deteriorated sharply.

“Economic activity, however, is expected to contract in the first half of the year before recovering gradually in the second half of 2020-21 on the back of various fiscal, monetary and liquidity measures undertaken in the recent period,” said Das.

“Overall, the GDP growth in 2020-21 is estimated to remain in negative territory. The pace of recovery will be contingent upon the containment of the pandemic and how quickly social distancing/lockdown measures are phased out,” Das said.

Overall, this is the second statement from the governor on likely contraction in the economic growth due to Covid-19. In his last monetary policy statement Das first suggested that growth is likely to remain negative this year. “Given all these uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from H2: 2020-21 onwards,” Das said.

Das committed an accommodative policy going ahead. “I also vote for persevering with the accommodative stance of monetary policy,” the governor said. Not just Das, his deputy Michael Patra too have flagged major threats to growth on account of pandemic.

Patra, who is in charge of monetary policy at the central bank, said: “My view is that the damage is so deep and extensive that India’s potential output has been pushed down, and it will take years to repair,” Patra said.

“The MPC has decided to remain accommodative as long as it is necessary to revive growth and mitigate the fallout of COVID-19.,” Patra said.

The MPC has reassured the government that it is willing to cut rates further if the situation warrants. But for these rate cuts to reflect on the ground, government needs to make sure banks are well capitalised. According to a BofA Securities report, Government-owned banks’ non-performing assets (NPA) could go up by 2-4 percent of the credit in the present economic environment. This, BofA says, will result in a recapitalisation requirement of $7-15 billion (Rs 1.14 lakh crore at the upper end).

How can a cash-starved government fund these banks? With revenues falling short of expectations and disinvestment not happening, the government is already walking a tight rope on fiscal discipline (expected around 5.5 percent this year).

The decision to borrow Rs 4.2 lakh crore additional itself was part of an emergency measure to cover the likely revenue losses. But PSB’s capital requirement cannot be ignored whether it happens through recap bonds or, as BofA suggests, by tapping RBI’s revaluation reserves.

If banks are reluctant to pass on the rate cuts to the end borrower, monetary policy actions, no matter how big is the quantum of the rate cut, do not have much impact. Till banks start lending,  RBI policy is a non-event for common man.

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