Union government has announced a new recap plan for revival of Public sector Banks.
What is the new plan about?
Under the recent recap plan, the Centre simply borrows from the banks to meet their capital requirements.
The Centre will raise money by issuing recapitalisation bonds to public sector banks.
This money will be funnelled back as equity capital into the same banks.
In effect, banks get to convert their liabilities into capital to absorb losses and fund their growth.
What is the need for new plan?
The Centre’s much touted differentiated recap approach is based on the premise that while stronger and non-PCA (Prompt Corrective Action) banks have been given capital to fund their growth.
PCA banks have been provided with funds to primarily meet their regulatory capital requirement.
Due to sharp slippages reported by PSU Banks, some of these banks did need the extra cushion to tackle their financial burdens.
Sharp slippages, mostly out of banks’ restructured accounts has also rightly drawn the RBI’s attention.
What are the concerns with Union government’s move?
Earlier Union government has announced an infusion of a whopping Rs 88,000-odd crore of capital into ailing public sector banks, which has created furore.
After all, it was depositors’ money being used to bail out these banks.
Depositors were irked by the infamous ‘Clause 52’ of the FRDI Bill that empowers the Resolution Corporation overseeing bank defaults to invoke bail-in and cancelling any/all of the bank’s liabilities.
It is unclear why many banks under PCA have been given capital, way above that needed to just meet the norms.
Hence, while in the past, the Centre has been pumping taxpayers’ money (ironically also depositors’) into PSU banks.
This time around, with a bit of financial jugglery, depositors have in effect stepped in to bail out their banks.
