Government is working on a rescue plan for state-run banks buried under NPAs

Indian government is preparing a contingency plan so that it can help state-run banks in case they no longer remain capable to handle the burden of bad loans.

If the worst possible thing happens, and stressed assets in the entire banking sector rise to Rs 12 lakh crore, the government would inject an amount equivalent to 3% of GDP, much more than the capital that it has currently thought of infusing in banks.

As of now, the total stressed assets in the banking system stand at about Rs 10 lakh crore, as per various industry reports.

The plan is being made after holding several meetings and discussions with regulatory authorities, since the economy is being thought of as unable to pick up pace until and unless bad loans are settled.

"Accounting for a recovery rate of 50 per cent and provisioning of about 17 per cent, the banking system could be salvaged by pumping just 3 per cent of GDP," a government official aware of the developments told ET.

Ending June, gross NPAs in the banking sector were as high as 8.7% of total loans, as against 7.8% in March end, and this figure is expected to go up to 10.1% by March next year, as per an RBI latest RBI Financial Stability Report.

As reported earlier, the government has injected Rs 22,915 crore to 13 banks during this fiscal, and with more money expected to come in via spectrum auctions and disinvestment receipts, is ready to pump in more money into these banks if need be.

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