Economy

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KEY POINTS

Issue

·        The Centre plans to infuse around Rs. 2 lakh crore capital over the next two years into PSBs.

·        This would be partly funded through budgetary allocation and fundraising from the markets and partly by the sale of recapitalisation bonds.

Need for recapitalization

·        India is witnessing a record low growth rate and a poor private investment record.

·        The mounting NPAs (non performing assets) has long been an issue of concern with deteriorating capital position of the PSBs.

·        The government’s capitalisation package is thus essential for the cash-starved PSBs at this juncture.

·        To help the PSBs in meeting the Basel III requirements.

·        In all, the capitalisation drive can boost the economy, spur investments and create jobs.

Boosting Private Investment

·        State-owned lenders are saddled with a mountain of bad debt that has crimped their ability to extend new credit.

·        Thus, reducing private investment.

·        The bank recapitalisation would ensure genuine borrowers get adequate funding.

·        It is expected to enable the banks to lend more freely and also help revive private investment.

Challenges

·        This move will enable banks to not take adequate precautions when they are lending when they know that the government will step in to help if the loans turn sour.

·        The government should be selective about which banks get the additional capital on offer. 

·        Without a major reform in financial sector in general and PSBs in particular, an aggressive capital infusion by the government should not become an alternative for better governance.

Indian PSUs bank is suffering from huge problem of non performing assets (NPA)  & there profitability is deteriorating day by day.

At present NPA is around 12%.Since main source of earning  for a bank is via lending or providing credit but banks are suffering from NPA problem this will affect there lending capacity & in turn there profitability.It will leads to fall in share prices of these PSUs bank.

Because of huge NPA banks capital get blocked in various project this will affect there lending capacity.

Any fresh loan will be available at higher rate of interest & because of this investor will postponed there investment plan . This will negatively affect the economy & GDP will start declining. So it is important to provide extra capital to these bank & for this recapitalization of bank will help.

Government of India announced Indradanush plan for the recapitalization of the bank.Recently government announced Rs 2.11 lakh crore as recapitalization to banks in2 years.

Through recapitalization banks will get fresh capital & which can be used for lending purpose at economical rate.This will help the investor to start investing in the project through loan from the banks.This will be lead to employment generation which in turn leads to demand generation for other products also.It will further leads to investment in other sector also to meet the demands & it will boost the overall economy.