On October 24, 2017, Union Government announced to infuse Rs. 2.11 lakh crore capital over the next two years into public sector banks (PSBs). This announcement was made by Finance Minister Arun Jaitley post a cabinet meeting in which this recapitalisation plan was approved.
Need for Recapitalisation of Public Sector Banks:
On account of indiscriminate lending earlier, Indian public sector banks have accumulated high level of non-performing assets (NPS).
- The NPA problem has been affecting the profitability of these banks and is thereby curtailing their ability to extend new loans.
- Unavailability of fresh credit for private investment especially to small and medium enterprise is not only causing a slowdown in Indian economy but is also affecting employment generation.
- Added to this woe was the demonetisation drive in November 2016 which sucked out 86% cash from circulation. This was followed by destocking by manufacturers ahead of Goods and Service Tax (GST) Implementation in July 2017.
- Owing to these factors, in April-June 2017 quarter, Indian economy grew at 5.7% which is the weakest pace since 2014.
- Thus the latest announcement of capital infusion in PSBs is a part of an attempt to boost up the economy and reinstate the growth momentum.
Recapitalisation Plan – Breakup
18000 crore out of Rs. 2.11 lakh crore will be funded through Government’s Indradhanush Plan. In 2015 Government had announced Indradhnush Plan to infuse Rs 70,000 crore in public sector banks over four years to meet their capital requirement as per Basel –III norms.
- 1.35 lakh crore for recapitalisation will be raised through sale of recapitalisation bonds.
- Balance amount will be raised by selling parts of Government stake in these banks.
- The direct positive impact of this plan will be on banks’ balance sheets which may have to take a haircut post the ongoing insolvency proceedings.
- MSME (Micro, small and medium enterprises) which are in Government’s priority list will now have access to enhanced credit facilities. This shall further help in creation of more job opportunities.
- Post capital infusion, banks will become compliant with Basel – III norms of capital requirement.