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Q. Recapitalisation plan for banks: Discuss the Central Government’s plan to recapitalise public sector banks.
Jul 22, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently central government has set aside ₹22,915 crore, i.e. 92% of its targeted allocation for financial year 2017, towards capital infusion into public sector banks. As currently public sector banks are facing various issues, the new infusion may help reinforce both depositor and investor confidence in state-owned banks.

Analysis-

  • Due to high amount of bad loans, concerns are mounting about how economic revival of banks can be sustained without adequate funds. In this background central government’s decision to infuse capital is good move.
  • This recapitalisation package has come at the beginning of this fiscal year instead of the fag end, and that 75% is to be released immediately, will not only boost the banking sector, but also other sectors will get benefit of it.
  • With accelerated bad loan clean-ups forcing banks to report sharply higher non-performing assets (NPAs) in recent quarters, this pre-emptive infusion may help reinforce both depositor and investor confidence in state-owned banks.
  • As deposit growth at multi-year lows and stock prices of most PSBs languishing below book value, in such situation this infusion will act as a confidence booster.

Suggestions-

  • While allocating funds to banks, government must ensure earlier performance and accountability norms envisaged in Indradhanush revamp package to shore up public confidence.
  • Similarly government should make performance parameters more effective, so that banks operate in more competitive way.
  • Also banks need to be more aggressive to tap markets for capital over next few years.

Conclusion-

Public sector banks are facing various issues like high loans, sinking credit growth etc. hence recent plan to infuse capital is quite badly needed. It will boost the confidence of both depositor and investor in state-owned banks. But while allocating funds to banks government must ensure accountability from banks end, so that public sector will improve their performance and yield desired benefits.


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