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Govt approves capital infusion in 12 PSBs

Topics covered:

  1. Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
  2. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
  3. Inclusive growth and issues arising from it.

 

Govt approves capital infusion in 12 PSBs

 

What to study?

  • For Prelims: What is bank recapitalization? About PCA- meaning, exemptions and norms.
  • For Mains: Recapitalisation- concerns associated, need and the need for comprehensive solution.

 

Context: The Central Govt has approved the capital infusion of Rs. 48,239 Crore into 12 public sector banks (PSBs).

 

Background:

  • The latest round of capital infusion is aimed at equipping better-performing PSBs under prompt corrective action (PCA) framework of RBI to be above regulatory PCA triggers such as CET-1 ratio of 7.375%, Tier I ratio of 8.875%, CRAR of 10.875% and NNPA below 6%.
  • With the latest funding, the total amount of capital infusion would increase to Rs 100958 crore of the planned recapitalization of Rs 1.06 lakh crore for PSBs in FY2019.

 

Concerns associated with frequent capital infusions:

  • The government as the major owner is free to recapitalise but the issue is, at what cost, for how long, and whether recapitalisation alone is enough.
  • The government is finding it increasingly difficult to recapitalize public sector banks due to the compulsion to adhere to the stringent budgetary deficit benchmarks.
  • Bankers become lackadaisical toward debt recovery and tend to escalate provisions and contingencies to be adjusted against the fresh capital.
  • In different-banks-same-pay situations, employees in the loss-making, but recapitalized, banks become unenthusiastic while those in profit-making, but not recapitalized are demotivated.
  • It also implies cross-subsidization: dividend-paying PSU banks subsidizing the non-dividend paying. Ultimately, systemic efficiency suffers.

 

Way ahead:

PSBs are in very real danger of losing not only their market share but also their identity unless the government intervenes with surgical precision and alacrity. Hence, policymakers and bankers need to put their heads together and come up with a smart option to resolve an issue that can no longer be put on the backburner.

 

Sources: the hindu.

Mains Question: In the light of NPA problems being faced by the Indian banking sector, suggest ways to strengthen the banking sector.