Providing Succour

Half a dozen weak public sector banks (PSBs) under the Reserve Bank of India's (RBI's) prompt corrective action (PCA) framework will soon be able to re start lending. Union Budget 2019/20 has announced a Rs 70,000 crore capital infusion for state owned banks, which control two third of the banking system's deposits and advances. Also, strong non banking financial companies (NBFCs) will now have a ready window to sell retail assets to banks to raise resources. The government has offered to protect the first set of losses (up to 10 per cent) that banks will suffer if these investments turn bad. Similarly, the government's bold decision to tap overseas markets for borrowings to bridge the fiscal deficit will ease pressure on banks to buy government securities. This will give banks more room to support India Inc. and lower long term interest rates. This is, of course, risky too, as foreign currency volatility