Capital idea? on banks recapitalisation plan

Capital idea? on banks recapitalisation plan

News:

Arun Jaitley presented the budget for 2018-19, and allocated ₹65,000 crores to recapitalize public sector banks.

Important Facts:

Major issues with Banking Sector:

• Public sector banks have been facing a massive problem of nonperforming assets (NPAs) or bad loans.
• Bad loans are those which have not been repaid for a period of 90 days or more.
• As of September, NPAs stood at ₹8.71 trillion. In order to keep these banks going, the government needs to infuse more capital into them.
• Last year, the government invested ₹90,000 crore. Between April and November, it invested ₹22,904 crore.
• This apart, banks have raised some money from the market. Of this, ₹8,247 crore has gone to Punjab National Bank, the second-largest public sector bank in India.

How recapitalization will help the banks

• The Reserve Bank of India (RBI) has put 11 public sector banks, which were facing a severe bad loans problem, into the prompt corrective action (PCA) framework, severely limiting their lending and deposit-raising operations.
• The government hopes that with the fresh infusion of capital, four or five banks will be able to exit the PCA framework.
• More importantly, it will also prevent three banks, including Punjab National Bank, from becoming part of the PCA list.
• Besides, it will help these banks to lend more. Some capital will also be infused into banks that are being merged.

Will recapitalization solve this issue?

• Taxpayers have paid for bank recapitalization through higher excise duty on petrol and diesel. As of the end of September, 95 borrowers had defaulted on loans of more than ₹1,000 crore, with the total amounting to ₹5.57 trillion.
• This is where banks need to concentrate for recoveries. The good news is that public sector banks have managed to recover ₹60,726 crores between April and September.

Additional Facts:

RBI’s Prompt Corrective Action

• RBI has issued a policy action guideline (first in May 2014 and revised effective from April 1, 2017) in the form of Prompt Corrective Action (PCA) Framework if a commercial bank’s financial condition worsens below a mark.
• The PCA framework specifies the trigger points or the level in which the RBI will intervene with corrective action. This trigger points are expressed in terms of parameters for the banks.
• The parameters that invite corrective action from the central bank are:
  • Capital to Risk Weighted Asset Ratio (CRAR)
  • Net Non-Performing Assets (NPA) and
  • Return on Assets (RoA)
  • Leverage ratio