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PSBs Recapitalisation Plan

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January 25, 2018

Why in news?

  • The government recently announced the details of the earlier said Rs. 2.1 lakh crore recapitalisation plan for public sector banks.
  • Click here to know more on the plan.

What are the provisions?

  • Package - The recapitalisation package will be spread across current financial year 2017-18 and the next year 2018-19.
  • The government will infuse around Rs 88,000 crore into 20 public sector banks.
  • These banks account for more than 80% of the bad loans.
  • Themes - The plan includes a reforms package across six themes.
  • They are:
  1. customer responsiveness
  2. responsible banking
  3. credit offtake
  4. PSBs as Udyami Mitra (friends of entrepreneurs)
  5. deepening financial inclusion and digitalisation
  6. developing personnel for brand PSB
  • The whole-time directors of the PSBs would be assigned theme-wise reforms to oversee.
  • Their performance on the themes would be evaluated by the boards of the banks.
  • Differential approach - The recapitalisation package would follow a differentiated approach for banks.
  • The capital infusion for the PSBs would be dependent on banks' performance.
  • Accordingly, the government will give more money to the weakest ones.
  • These are the 11 lenders under the Reserve Bank of India’s Prompt Corrective Action (PCA).
  • In financial year 2017-18, PCA banks would get around Rs. 50, 000 crore.
  • The comparatively healthier non-PCA banks would get around Rs. 35,000 crore.
  • Recapitalisation bonds - The capital infusion will be done partly by recapitalisation bonds and partly by budgetary support.
  • The bonds are to have a maturity period of 10-15 years and would be issued in six different slots.
  • They will not have a statutory liquidity ratio (SLR) requirement and would be non-tradeable.
  • The government has set strict terms for issuing the recapitalisation bonds to PSBs.
  • The terms include :
  1. creating a stressed asset management vertical
  2. tying up with agencies for specialised monitoring of loans above Rs 2.5 billion
  3. strict surveillance on big loan defaulters
  4. appointing a whole-time director for monitoring reforms every quarter

Will there be a fiscal impact?

  • There are apprehensions that the recapitalisation bonds would affect the fiscal consolidation efforts by the government.
  • The government however assured that it would not have any substantial impact on the fiscal deficit.
  • This is because the recapitalisation bonds would be "cash neutral" (does not need net cash for a transaction).
  • The fiscal deficit will be impacted only by the interest cost on the bonds that the government pays every year.

What are the benefits?

  • The recapitalisation package will create an incremental lending capacity with the banks.
  • This is expected to catalyze the revival of the capital investment cycle in the economy.
  • Banks will now be sufficiently capitalised to maintain regulatory capital requirements and also to lead growth.
  • Banks would have to subject themselves to reform, become more professional, and do prudent and clean lending.
  • The government would bring out a report card on compliance of these measures.

 

Source: The Hindu, Business Standard

 

Quick Fact

Prompt Corrective Action (PCA)

  • PCA is primarily to take appropriate corrective action on weak and troubled banks.
  • The RBI has put in place some trigger points to assess, monitor and control banks.
  • The trigger points are on the basis of CRAR (a metric to measure balance sheet strength), NPA and ROA (return on assets).
  • Based on each trigger point, the banks have to follow a mandatory action plan.
  • RBI could take discretionary action plans too apart from these.
  • RBI has initiated prompt corrective action (PCA) in as many as 11 PSBs.
  • It prohibits them from undertaking fresh business activities such as opening branches, recruiting talent or lending to risky companies.

Recapitalisation bonds

  • The idea is to borrow from the banks themselves and boost the weaker banks’ capital, without immediate demand for direct government budgetary support.
  • Banks will subscribe to these bonds as part of their investment portfolio.
  • They will use the excess deposits they acquired from the recent demonetisation drive to invest in the bonds.
  • The money raised by the government will then be used to infuse fresh equity into weaker banks.

 

 

1 comments
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praskass 4 years

ecapitalisation bonds would be "cash neutral" (does not need net cash for a transaction).------what does this mean .can anyone explain in lucid

Devesh 4 years

cash neutral means u dont need cash to lend some one. Instead u can borrow from one and lend it to another . Eg. central government need now spend its come for PSB. It is going to borrow from market and give it to PSB.

Devesh 4 years

cash neutral means u dont need cash to lend some one. Instead u can borrow from one and lend it to another . Eg. central government need now spend its own money for lending PSB. It is going to borrow from market and give it to PSB

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