Recapitalisation & Financial Sector Reforms | Banking Awareness Series

Hello friends,
Welcome back to Exambin’s Financial learning series. In this session we are going to know about the recapitalisation in financial sector and why it is needed at this time.

Why recapitalisation is in news?

RBI Governor has recently spoken about Recapitalisation of banks needs to be done with a clear and structured foresight.

What is recapitalisation?

• Generally, Recapitalization is a process of restructuring a company’s debt and equity mixture, often with the aim of making a company’s capital structure more stable or optimal.

• Re-capitalisation of banks means infusing additional capital that is liquid money into the banks in order to give them the liquidity needed to carry out lending and other banking functions.

• On that note, it is a positive sign that the RBI, as the sector’s regulator, and the government, as the principal shareholder of these banks, now are in consultations on the problem.

Why did the liquidity crunch arise?

• The banking sector is badly affected by the build-up of gross Non-Performing Assets (NPAs) which led to liquidity crunch.

• It has also been observed that NPAs are heavily concentrated in Public Sector Banks.
• Some PSBs have NPAs in the range of 15 to 24 per cent.

• This has resulted in slowdown in bank’s lending to industry and retail growth, thus holding back private investment in economic growth.

• The prevalence of bad loans also presents a serious systemic risk to the financial system.

How much is the figures to worry?

• Gross NPAs stood at almost 9.6% of the total bank loans at the end of the last financial year.
• Stressed advances are another 12 per cent as of March 2017
• As much as 86.5 per cent of GNPAs are accounted by large borrowers
• Total Bad loans is reportedly being at Rs.9 Trillion or 9 Lakh Crores.

What are the priorities in this regard?

• NPA Problem -Settling the existing bad loans might require banks to write off a considerable sum, which would affect their capital provisioning, thereby requiring re-capitalisation.
• But, given that NPAs are over Rs 9 lakh crores, a straightforward recapitalisation of PSBs would greatly strain the government’s fiscal position.
• Furthermore, in the absence of deep governance reform, it is uncertain that the NPA problem will ever be solved.
• It is essential, therefore, that the structure of any bank bailout be such that future bad behaviour is not incentivised.
• Disinvestment – Besides capital infusion by the government, raising capital from the market by dilution of government equity and sales of non-core assets are also being considered.
• Dilution of government equity must be accompanied by a reduction in effective government control to make it an attractive buy for the private sector.
• Incentive Mechanism -A mechanism to hold poor performer banks accountable and incentivising good ones is needed.
• Such an approach will produce a stronger public sector banking system.
• Certainly, India cannot afford to pour in more money to the bad performers by penalizing good performers.

What are the steps taken so far?

• The government has made a budgetary provision of pumping in Rs 75,000 crore into state-run banks for the four-year period ending March 2019.
• On June 13, the RBI had drawn up a list of 500 largest defaulters and made public 12 of the largest among the larger list and asked banks to get these accounts cleared through the National Company Law Tribunal.
• These 12 accounts comprise Bhushan Steel, Bhushan Power & Steel, Essar Steel, Lanco Infra, Amtek Auto, Electrosteel Steel, Jaypee Infra, Alok Industries and Jyoti Structures, Era Infrastructure, ABG Shipyard and Monet Ispat which together account for over 25% of the total bad loans of Rs 9 trillion of which Rs 6 trillion are with public sector banks alone.


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