Centre seeks ₹41,000 crore more to recapitalise banks

Centre seeks ₹41,000 crore more to recapitalise banks

News:

The Union government has sought Parliamentary approval to provide Rs 41,000 crore as a recapitalization fund to public sector banks during the current fiscal, 2018-19

Important Facts:

• The amount will be used for the “recapitalization of Public Sector Banks through issue of Government Securities“, and the details were given in Supplementary Demands for Grants.
• Once the proposal will be approved this would take the total recapitalization package for the current financial year to ₹1,06,000 crores, of which the government plans to utilise ₹83,000 crore over the remaining portion of the year.
• The government had announced a ₹2.11 lakh crore capitalization plan in October 2017, of which ₹1.35 lakh was to be raised through recapitalization bonds and the remaining was to be raised by the banks either through the market or the sale of non-core assets.
• So far, the banks have raised ₹24,400 crores and have received all approvals to raise more from the market.

About Recapitalization

• Recapitalization is restructuring a company’s debt and equity mixture, often with the aim of making a company’s capital structure more stable or optimal.
• Recapitalization of banks was necessary because the PSBs are facing financial problems and they need money in the context of rising bad debts.
• Similarly, they need funds to meet the higher capital requirements under Basel III norms. Altogether, there are following three sound reasons for recapitalization of PSBs.
  • Rising volume of bad assets has led to erosion of capital.
  • The Basel III capital norms requires higher capital in banks.
  • Expanding credit needs in the economy can be made only with higher capital.
• Four Broad conditions under which banks are eligible to receive capital.:
  • To meet the regulatory capital norms.
  • The second is aimed at helping banks currently under the Prompt Corrective Action (PCA) framework to come out of it by improving their capital to risk-weighted asset ratios (CRAR) to 9%, their capital conservation buffers to 1.875% and reduce their net NPAs to 6%.
  • The third category of banks to receive capital would be the non-PCA banks that are in danger of crossing the threshold into the PCA framework.
  • The fourth would be to provide regulatory and growth capital to banks that are undergoing mergers, such as Vijaya Bank, Dena Bank, and the Bank of Baroda, which are to be merged into a single entity.
• The Finance Ministry says this expenditure will not have any impact on fiscal deficit and that the Union government will be able to keep the deficit at 3.3 percent of GDP.
• In context of recent demand for recapitalization fund the state-run banks are showing tremendous improvements in terms of recognition, provisioning, recovery and reforms. Therefore, it is important that Government empower them and equip them with capital so that banks are ready to support growth of the fastest growing economy

Following are the three modes of fund mobilization under recapitalization effort.

• Budgetary allocations: Government buy shares of public sector bank.
• Market Borrowings: PSBs mobilise fund from the market through borrowings.
• Recapitalization Bonds: Government will issue Bank Recapitalization Bonds

Way Forward:

• It is time to re-evaluate the benefits of having a banking system dominated by public sector banks and the benefits that greater private ownership can bring about.
• Impact of recapitalisation could be bad on fiscal deficit of India as it may increase the fiscal deficit gap.
• The capital infusion will address the problem of stock of NPAs by cleaning up the balance sheet. It is equally important to ensure that the cycle of piling up of NPAs is not repeated
• Emphasizes must be laid upon the steps to be taken to ensure governance of banks to follow highest standards. There is also a need for institutional mechanism to ensure the past is not repeated
• Banks should not look for easy money like recapitalization. They need to earn and must adopt the differentiated business strategy and exit from non-core businesses and focus on their core competencies.
• According to the financial services secretary the government would come out with EASE (Enhanced Access & Service Excellence) Index for ranking of banks. This would increase public accountability of PSBs as independent agencies would evaluate and rank PSBs annually on reforms.

Additional Facts:

The regulatory architecture is globally framed by the Basel Committee on Banking Supervision—a committee of bank supervisors consisting of members from representative countries. Its mandate is to strengthen the regulation, supervision and practices of banks and enhance financial stability.

• Category of of Basel Norms.
  • The Basel I norms were issued in 1988 to provide, for the first time, a global standard on the regulatory capital requirements for banks.
  • The Basel II norms, introduced in 2004, further strengthened the guidelines for risk management and disclosure requirements.
  • Capital adequacy ratio (CAR)—or, capital to risk-weighted assets ratio (CRAR) as it is the ratio of regulatory capital funds to risk-weighted assets—which all banks with an international presence were to maintain.
  • These norms were revisited again in 2010—known as Basel III norms— Are a comprehensive set of reform measures to strengthen the regulation, supervision, risks and capital management of the banking sector that evolved after the global financial crisis of 2008.