Bank Recapitalization

Free PDF's 5th August 2023

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Recapitalizing banks helps them meet Reserve Bank of India capital adequacy requirements. Since 2016-17, the Union Budget includes bank recapitalization. The Centre injected Rs.3.31-lakh crore into banks between FY17 and FY21.

Need-

Tackle NPAs- High NPAs around 11% in 2020-21.
Meet regulatory norms like capital adequacy ratio of around 11%
To maintain the virtuous cycle of investment, credit growth and employment generation
Give stimulus to the economy by decreasing lending rate and increasing investment.

Benefits-

It will help in increasing the investment in the economy by bring down the interest rate and asset building
It will help improve the financial risk profile of the banks.
Cushion against the expected rise in the NPAs
Global financial crisis influences in providing lending hand to the state-run banks which form 70% of banking system.
Improves the credit rating of the economy and make the economy investor friendly.

Impact of the previous recapitalization exercise

The average capital adequacy ratio for PSBs is at about 15 per cent, which is among the highest we have seen in the last decade.
Aggregate CRAR of 46 major banks has been projected to slip from 15.8 per cent in September 2022 to 14.9 per cent by September 2023 but it stays well above the minimum capital requirement, including capital conservation buffer (CCB) requirements (11.5 per cent).
Deposit growth is also keeping pace-The incremental deposits in the last 10 months of the current fiscal is Rs.12.53 trillion against Rs.9.2 trillion in FY22.
Banks are well poised to grow at approximately 15 per cent over this fiscal and next, with limited need for incremental capital to maintain regulatory levels.

Challenges-

Increased government spending in saving banks→ increased fiscal deficit→ decreased spending on capital expenditure and welfare.
Apprehensions that there might be no change in governance.
It might impact the work culture in terms of leniency in checking the credit score.
Issues in achieving the accountability of the PSBs.

Way ahead-

Reskilling and recruitment of specialists as advisors.
PSBs should be given adequate operational flexibility.
Effective monitoring of the intended objective
Creation of Bank Investment Company for professional management of PSBs.
Decreasing bureaucratic interference.

Conclusion-

Union budget 2023-24 does not set a bank recapitalisation target due to bank efficiency. While Bank Recapitalisation was necessary during the banking crisis, more attention should be given to improving work culture and making banking staff equal stakeholders for the banks' proper functioning, which requires an administrative overhaul.