“ARC will be set up to manage bad debts. Bad banks will now be a reality. It will go a long way in resolving stressed assets in India,” said Siddhart Srivastava of Khaitan & Co.
The finance minister said that the government will further inject Rs 20,000 crore in state-owned banks to recapitalise them.
The announcements helped the Nifty PSU Bank index rise 8.2 per cent.
The recapitalisation of fresh capital and the asset management company for bad loans is expected to boost the balance sheet of state-owned banks, which are expected to nurse high levels of bad loans related to Covid-19 pandemic once the Supreme Court lifts its standstill of bad loan recognition.
The Reserve Bank of India’s Governor Shaktikatna Das has repeatedly called for the government to recapitalise banks as he feels that the worst of the pandemic’s impact on banks’ balance sheet is yet to happen.
The central bank’s stress test results showed that the state-owned banks could see their gross non-performing assets ratio deteriorate to 16.2 per cent in the baseline scenario and 17.6 per cent in the worst case scenario. At the end of September, gross NPAs at state-owned banks was at 9.7 per cent.