Bank Recapitalization - A Plan to Overcome

Bank Recapitalization Plan - An Overview

Introduction:

• In order to increase the debt and increase economic growth, the government has paid a total of 22,915 crore capital to 13 state-run banks.
• Based on an evaluation of the need for credit growth from the CAGR for the past five years based on the capital induction exercise for this year.
• This step will provide demonetization assistance for loan programs and banks also get the opportunity to raise funds from the market.
• It is to be noted that the rate of interest of the Reserve Bank of India has decreased by 150% compared to January 2015, which has come down to 6.5% in 2015.

Money allocated to individual banks as follows:-

Bank Name	Amount in Crore
State Bank of India	7575
Punjab National Bank	2816
Indian Overseas Bank	3101
Central bank of India	1729
United Bank of India	810
Allahabad Bank	44
Syndicate Bank	1034
United Bank of India	721
UCO Bank	1033
Canara Bank	997
Corporation Bank	677
Dena Bank	594
Bank of India	1784

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 recapitalization 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 preemptive 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 Public Sector Bank (PSBs) languishing below book value, in such situation this infusion will act as a confidence booster.

Suggestion:

• 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 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 etc. hence recent plan to infuse capital is quite badly needed. It will boost the confidence of booth 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.