The government sought Parliament’s approval for supplementary grants worth ₹41,000 crore to infuse fresh capital into ailing state-run banks in the current fiscal.
The additional capital could help as many as five such state-run banks exit the prompt corrective action (PCA) framework that mandates them to pare lending to companies and cut concentration of loans to certain sectors.
The additional capital could help as many as five such state-run banks exit the prompt corrective action (PCA) framework that mandates them to pare lending to companies and cut concentration of loans to certain sectors. Eleven banks were put under the PCA framework by the Reserve Bank of India between February 2014 and January 2018.
The government had budgeted ₹65,000 crore for infusion into public sector banks (PSBs) through recapitalization bonds this fiscal, of which ₹42,000 crore is still to be allotted. With the additional ₹41,000 crore of capital infusion by 31 March, the government will be infusing a total ₹83,000 crore into public sector banks this year.
The capital infusion will be utilized to ensure that the better-performing banks under the PCA framework meet their regulatory capital norms and non-PCA banks do not breach the threshold.
Concerns associated with the recapitalization of banks:
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.
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.