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RBI & Government in discussions for recapitalisation of banks

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The RBI and the government are in discussions over recapitalisation of state-owned banks.

It would also allow banks to take some decisions which may imply that they would need to use some of that capital for cleaning of the balance sheet.

This year in the Budget, the government has allocated Rs 7,940 crore for capital infusion in state-owned banks but the government has vowed to provide more in the current fiscal.

RBI governor Raghuram Rajan said that there is a legitimate concern about whether banks have the capacity to do the right thing in cleaning up their balance sheet and some of that requires provisioning. So this is where capital infusion becomes important.

Recapitalisation of the Banks

Recapitalisation of banks is done with the aim of making its capital structure more stable. This could be done by issuing new shares or loan from a government. This improves the banks’ bank balance and prevents them from ruining.

Why Recapitalisation?

When the liabilities of banks are greater than their assets then they technically owe more to other people than assets they own.

Such situation arises when

  • People failed to pay loans
  • When banks lends money to a company and they loses it
  • Due to recession.
  • When value of an asset reduces like houses then by their repossession it will be difficult to get back the value of original loan.