BANK MANAGEMENT

BY-
C.NAOMI REANNA
1720544
5BBA-E
 BANK RECAPITALIZATION IN INDIA
Public sector banks account for 70 percent of total banking assets in India. The ‘lack of
dynamism’ in banking practices at the bank level and at the Finance Ministry level to control
judiciously the flow of finance and recovery system to stop an account from turning into NPA,
keeps these Public Sector Banks starved of funds and crying for more capital infusion every
now and then. Since the government has a majority stake in Public Sector Banks, it has to
inject capital through the Recapitalization in these banks. Government proposes to issue
Recapitalization bonds, raise equity from the market and make budgetary allocation.
Most of the PSBs have huge stocks of non-performing loans on their balance sheets.
The banks' deteriorating balance sheets have limited their ability to lend, and that has affected
the bank credit growth in India. Hence, a massive recapitalisation was deemed as necessary to
clean up the balance sheet of the banks.

ADVANTAGES

Recapitalization Tools worth Rs.2.11 Lakh crores

The Government has proposed the recapitalisation of banks worth 2.11 lakh crores which is
to be done in following manner
 Budgetary allocations: Rs. 18000 crore
 Issue of equity shares by banks in the market: Rs.58000 crore
 Issue of Recapitalisation bonds by the Government: 1.35 lakh crore
NPAs: Cause of worry
These commercial banks have to indulge in various types of loss making finances where the
recovery is either very low or no recovery. Even the principal amount is not returned by the
borrowers and this gives rise in consistent increase of Non-Performing Assets (NPAs). These
lending could be as per the directives of Government of India, classified as priority sector
lending or could be big commercial finances like that of Kingfisher. The big and influential
business magnets like Vijay Mallya of Kingfisher has swallowed thousands of crores of
banking system and run away. All these factors make already fund starved banking industry
cry for more capital.

More capital needed to meet capital Adequacy of 8%

 Banks have to follow BASEL-3 norms. These are the international banking regulations that
have to be followed by the banks in all countries. According to it, the banks have to maintain
a capital-adequacy ratio of at least 8 %. The capital-adequacy ratio is the ratio of capital to the
risk-weighted assets (loans etc) . Hence, more capital is required to be able to give more loans.

Rs.88,139 crore Recapitalization by March 31, 2018

The government will infuse Rs. 88,139 crore capital in Public Sector Banks (PSBs) before
March 31 to boost lending and to revive growth. This is part of the Rs.2.11 lakh crore bank
recapitalisation plan announced in October 2017 last year.

Government also proposes to recapitalize the banks if they are ready to implement a series of
reforms to get the funds, including improving their due diligence, allowing specialised
monitoring for loans above Rs.250 crore, and limiting the number of lenders that can group
together to dole out loans.

Biggest Recapitalization for PSBs in Banking history

This is not the first time that the bank recapitalisation bond will be issued in India. According
to the data by Bloomberg, in the year 1994, India had sold about 48 billion rupees of 12-year
recapitalisation bonds at a coupon rate of 10%.

Despite using the taxpayer's money to get these public sector banks out of the financial crisis
earlier also, the recapitalization of Rs.2.11 lakh crores to PSBs proposed now, is the largest till
date.

Since tackling the root of the banking system's problems is the government's top priority to
avoid another acceleration of bad loans, the huge funding may not be avoided.

DISADVANTAGES

1. 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
2. Impact of recapitalisation could be bad on fiscal deficit of India as it may increase the fiscal
deficit gap.
3. Recapitalisation can give some breathing space to the banks for some time. But the need is to
correct the rot in the banking sector. The Government should follow it up with structural
reforms to reduce its role in the public sector banks and move towards privatisation. This will
bring in efficiency and accountability and better NPA management.
4. 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
5. Finance Minister Arun Jaitley emphasizes on the steps to be taken to ensure governance of
banks to follow highest standards. According to him there is a need for institutional mechanism
to ensure the past is not repeated. "Now the entire objective of this exercise is that the
government has the prime responsibility of keeping the public sector banks in good health,"
Jaitley said.
6. 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.
7. 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.
8. It must be ensure that the proposed infusion of capital into the banks is sufficient and the banks
would not become the fund starved again.