The Centre has announced on Monday that it is planning to recapitalise 21 public sector banks (PSBs) this month. The budget has been allocated to Rs 25,000 for the financial year 2016-17. The first tranche could add up to about Rs.10,000 crore, said a source in the Finance Ministry.
What is recapitalisation?
Recapitalisation involves a major change in the way a bank is funded. It involves providing the bank with new capital (money/funds), e.g. government agrees to buy new shares. This improves the banks’ bank balance and prevents them from going bust.
Why do PSBs need recapitalisation?
The PSBs in India account for the country’s 70 percent of the total banking asset. The NPA’s (Non Performing Assets) is at 7.6 per cent in proportion to the total advances of the bank which has been the highest over 12 years. A loan is called bad loans where repayments are not being made as originally agreed between the borrower and lender and there is a possibility that the loan might never be repaid.
Earlier instance of recapitalisation of PSBs
The Union government has recapitalized more than Rs 81,000 crore in the last 15 years for PSBs. Most of the money has flown between 2010 and 2014. In 2015, Rs.11,200 crore was allocated for the purpose, but the actual capital infusion was Rs.6,900 crore into nine public sector banks, based on their performances.
Does tax payer end up paying up for the bad loans?
Recapitalisation is a necessary exercise for Public Sector Banks, but, there is little accountability for the same. The recapitalisation completes the cycle, where tax money eventually pays the banks who have given bad loans to corporates like Mallya and others. Yes, recapitalisation need not be done only in the case of bad loans but for other reasons also. However, the record amount allocated to recapitalize banks shows how banks have been performing with respect to forwarding loans to big corporates.