Bank Recapitalisation

The Union Government has announced Bank Recapitalisation Plan to infuse Rs. 2.11 lakh crore ( $32.4 billion) capital into public sector banks (PSBs) and prioritised financing support for MSMEs in 50 clusters.

The capital infusion will be accompanied by a series of banking sector reforms that will be revealed in the coming months.

About Rs. 1 lakh crore is expected to be pumped into India’s 21 public sector banks by March 2018, which the Centre hopes will enable them to extend fresh credit lines worth over Rs. 5 lakh crore to spur economic activity.

Under this plan, PSBs will get Rs 1.35 lakh crore from Recapitalisation Bonds, Rs 18,000 crore from Budgetary support and remaining Rs 58,000 crore will be raised through sale of share of banks.

Simply put, recapitalisation of banks mean adding capital to PSBs.

As owners of PSBs, government can provide capital to them.

Recapitalisation injects money without incurring any liability and is different from loan because, loan has to be repaid.

Indian PSBs are saddled with high, non-performing assets (NPAs) and facing prospect of having to take haircuts on loans stuck in insolvency proceedings.

NPAs of banks had more than doubled to Rs. 7.33 lakh crore in June 2017 from Rs. 2.75 lakh crore in March 2015.

Due to this, PSBs were unable to give fresh loans. Even under the

Indradhanush roadmap introduced in 2015, Central Government had announced to infuse Rs 70,000 crore in PSBs over four years to meet their capital requirement in line with global risk Basel-III norms to keep these banks fully solvent.

For these entities, this capital offers a fresh lease of life as it will help meet regulatory requirements under the Basel-III regime as well as cushion them to an extent from possible haircuts on stressed loans that are going through the insolvency resolution process.

It will increase lending capacity of PSBs which will in turn boost economy and improve private sector investment especially when International Monetary Fund (IMF) projected growth to 5.7% which is lowest in three-year and create jobs.

The supply of money to PSBs will enable banks t0 lend at lower interest rates.

Depending on nature of recapitalisation bonds, their issuance can also impact the government’s fiscal deficit target i.e. government’s total expenditures may exceed the revenue that it generates (apart from money from borrowings).

The planned capital infusion still falls short of some estimates that Indian banks need $65 billion of additional capital by March 2019 to meet Basel III global banking rules.

RBI’s assertion that no public sector bank will fail and that depositors’ money will remain safe should allay customers’ worry about the safety of their savings under the proposed Financial Resolution and Deposit Insurance legislation.