Recapitalisation
means restructuring a firm’s debt
and equity mixture. It is done with
the aim of
making the capital
structure more stable.
Recapitalisation of
Public Sector Banks
is the introduction
of capital in the
banks, mainly through
equity investment by the government
to strengthen the financial
position of the banks. When the
Public Sector Banks
face financial problems
and they need
money because of rising debts
and also to
meet the higher capital
requirements of BASEL III norms, the
government being the
majority shareholder of
Public Sector Banks
holds the responsibility of
injecting capital to
them.
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BASEL
III norms are
the international banking
regulations that have to
be followed by the banks
in all countries .The Reserve
Bank Of India
introduced the norms
in India in
the year 2003. It
now aims to get all
commercial banks complaint
with BASEL III
by March 2019. So
far , the Indian’s
Banks are complaint
with the capital
needs . On an average, Indian Banks
have around 8%
capital adequacy. This is
lower than the
capital needs of
10.5% (after taking into
consideration 2.5% buffer). The
BASEL Committee credited the
RBI for its
efforts.
Recapitalisation of Public Sector
Banks is necessary
because of the
increasing volume of
bad assets , BASEL III
capital norms and increasing credit
needs in the country.
The Reserve Bank of India
is the central bank of
India. The Reserve Bank of
India was set
up on the basis of recommendations of the Hilton Young
Commission. The Reserve Bank of
India Act,1934(II of 1934)
provides the statutory basis of the functioning of the bank, which
commenced operations on
April 1, 1935.
After Independence, the Government
of India planned
on a systematic
economic development of the
country.
Earlier,
the commercial banks
were owned and managed
by the private
sector as they
were run by
business houses. These commercial
banks failed to
help the Government of India
in many ways, which
compelled the Government to
nationalize 14 major commercial
banks on 19th of July,1969. A
second wave of
nationalisation in banking
came into effect
in April 1980.
At present
there are 19
nationalised banks or Public Sector Banks in India. The
nationalised banks are
Allahabad Bank, Andhra Bank, Bank
of Baroda, Bank
of India, Bank of
Maharashtra, Canara Bank, Central Bank
of India, Corporation Bank, Dena
Bank, Indian Bank, Indian Overseas
Bank , Oriental Bank of
Commerce, Punjab & Sind
Bank, Punjab National Bank, Syndicate Bank, UCO
Bank, Union Bank of
India, United Bank of
India, Vijaya Bank.
Nationalisation of
Banks at that
point of time was
so as to
control the private
monopolies, for social-welfare,
expansion of Banking , create regional
balance, provide funds to
agricultural sector and
its allied activities.
India’s economic
growth is fluctuating
in the last
few years, the government
has been trying to
stimulate the economy. In
November 2016, the government
tried demonetisation and
GST in the
year 2017. These steps
taken by the
Government of India
may create short-term
disruption, but these have
economic benefits in
the long run.
The
Government also realised
the credit needs
of the country . To
enhance the flow
of credit the
government decided to
recapitalize the Public Sector
Banks. The proposal to
recapitalise the Public
Sector Banks to
the extent of
Rs.2.11 lakh crore
is a bold
move. It is the perhaps, the most
effective way to
provide a much
needed fiscal stimulus
to the economy
and revive growth.
The main
problem that led
to bank recapitalisation is
because of Non- Performing Assets (NPA). NPA is
basically a bad
asset.
The Liabilities
side of the Balance
Sheet of a Bank
, can be
divided into Shareholder’s Equity, CASA i.e., Current A/C
& Savings A/C, Time Deposits
i.e., the Fixed Deposits
and other borrowings. The Assets
side can be
divided into CRR
and SLR which
are the statutory
requirements, Loans, Assets , Investments –made in
bonds primarily Government
Bonds.
The
value of Assets
fall down, when the
loan becomes NPA. Approximately Rs.10 lakh crore has
become the NPA
with the Public
Sector Banks which
resulted in decrease
of Loan assets
at around Rs. 10 lakh crore and
consequently decreasing the
liabilities by Rs.10 lakh crore.
The liabilities can
be decreased only
from Shareholder’s Equity because
payment has to be done
to the debtors
and deposit holders, this
resulted in decrease
of Shareholder’s Equity. The
Banks could not
give more loans
because as per
BASEL III norms, the banks
need to maintain
a capital adequacy
ratio of at
least 8%. This was
the problem that
was affecting the
Public Sector Banks. Compliance with
BASEL III norms is not an
easy task for
Indian Banks, which have
to increase capital,
liquidity and also
reduce leverage which
would effect the
profit margins of the
banks.
“Stressed Advances” (represents non-performing loans
and restructured loans)
has risen from
a little over
10% in 2012-13 to
15% in 2016-17
which led to
fall in capital
adequacy of Public
Sector Banks. The minimum
capital required is
10.5%. According to an estimate 10
out of 20
Public Sector Banks
have capital of
just 1% point
above the minimum
or less. Between 2009-10
and 2014-15 , annual
credit was in
the range of
15-20% . In the shining
period of 2004-09
credit growth had
been over 20%.
According to
the CAG Report, Gross NPA’s of
PSB’s increased from Rs.2.21 lakh
crore ( 31st March ,2014) to
6.83 lakh crore (provisional) as on (31st March 2017). This
has again estimated
to be Rs. 8.2 lakh crore
as on July
2017. The main thrust
of government’s recapitalisation effort
is to tide
over the bad
debt problem.
In November,2016 demonetisation came
as a big
reform, wherein the public deposited
the cash money
available with them
in the banks
as CASA or Time
Deposits. As a result
the liabilities part
increased and correspondingly increasing
the assets side too, but
the banks cannot
give away these
money in the form
of loans and
therefore the money
which was collected
during demonetisation was
holded as investment.
Demonetisation made
the Government flush
with money but
since the government
cannot give away these money
as loans and
that is where
recapitalisation of banks
comes in. The Finance
Minister announced that
the government would
recapitalise the Public Sector Banks by
introducing more equity
in the bank.
The recapitalisation of
banks is to be
done in three
ways. Firstly, Straight equity of Rs.
18,000 crore , under the
Indradhanush plan over
the next two
years . Secondly, by
encouraging the banks
to get Rs. 58,000 crore from
the market, i.e., the banks
are going to
raise new equity
in the form of private
placements or FPO’s
from institutional and
private investors. Thirdly, Rs.
1,35,000 would be introduced
in the form
of Recapitalisation Bonds.
In recapitalisation bonds, the
Government of India
will borrow money
and will invest
it in the
share capital of
the banks and
therefore recapitalising them. For
borrowing the government
can approach the
International Banks to
raise money, Indian Banks and
it can approach
the bank themselves
and ask them
to invest the
money as investments
into the recapitalisation bonds.
This capital
infusion will address
the problem of Non
Performing Assets and will
strengthen the capital
base of the
banks by cleaning
up its Balance
Sheet. This move of
the government would
help the banks
to write off
its bad loans
and subsequently increase
its lending capacity.
The cause
of NPA is
the people working
in the bank . The
people who are
working in the
bank has not
followed correct practices
while lending out
and therefore these
loans resulted in
NPA.
It is
equally important to
ensure that the cycle
of piling up
of NPA’s is
not repeated. To tackle
the issue, the finance
minister announced two
things. Firstly, There will be
selective in recapitalisation of
banks , not all
banks will get
money , only those banks
will get money
as shareholders equity
which have good
lending practices .
Secondly, there will be
reforms in the
Public Sector Banks , which
includes working process, hiring process. These steps
are taken with
the hope that
the working culture
of these banks
improve and there
is non-occurrence of
NPA problem again.
Recapitalisation is
backed by corrective
or supportive measures
by the bank
management and employees . For this, Government is
signing a tri-party Memorandum
Of Understanding with
bank management and
employees. The tri-party MOU is
signed between Government, PSB management
and Employee Unions
for making recapitalisation performance
based.
Already 11
Public Sector Banks
have signed Memorandum
Of Understanding with
Department of financial services
since 2012 for
improving their performance
while obtaining recapitalisation fund. From
2014-15 onwards, there
was a shift
from ‘need based’
to ‘performance based’
capital infusion with
Return On Assets
being used as
the basic criteria
for capital infusion
The decision
of the Government
to recapitalise the
Public Sector Banks
will strengthen the capital
base of the
banks. According to Goldman
Sachs, it could boost
credit growth by up to
10%. The stock market
reacted positively to
the news. The day
after the announcement , 25th October,
2017 was
a historic day for
the market as
the SENSEX closed
beyond 33,000 for
the first time ever. The index
of Public Sector
Banks surged 30%
on that day.
The Bank
recapitalisation plan by
Government of India
is expected to
increase the credit growth
by 15% which would
consequently result in
increase in GDP by 7%
in the financial
year 2019.
In conclusion
it can be
said that, this recapitalisation of
Public Sector Banks
is a winner by
any reckoning because
even today the
Public Sector Banks
account for more
than 50% of
lending in the
country . Now, if the banks
suddenly are able
to lend more
money people will be
able to access
credit more easily, it
will boost the
economy as a whole. But
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.