Why recapitalize banks

Here are some of the latest instances where the banks have either made plans to raise money or have received approvals from the board to infuse capital:. According to rating agency ICRA, the initial requirement of fresh capital for government-owned banks was Rs 10,, crore for FY21, however, the Covid crisis has caused the capital requirements to rise to Rs 45,, crore for public sector banks and Rs 25,, crore for private sector banks.

The rating agency further stressed on the moratoriums concerning the NBFCs. In , the government announced its bank recapitalization plan for the public sector banks through the recapitalization bonds.

The banks were to subscribe to the government-issued recapitalization bonds by lending money to the government and thus showing it as an investment in their books.

The money borrowed by the government would be again flushed into the banks as capital, and as a result, the weaker balance sheets would be to strengthen with higher capital adequacy ratios. This process was done to eliminate any direct impact on the fiscal deficit at that point in time. Apart from , there have been 2 instances in the past where the government had infused capital by way of recapitalization bonds.

Intending to build a robust financial network and withstand the fears caused by the pandemic, it has become necessary for banks to raise capital not only to maintain the capital adequacy ratio but to go beyond the minimum requirements this time. Save my name, email, and website in this browser for the next time I comment. Notify me of follow-up comments by email. Notify me of new posts by email. Investment Tools to beat Inflation in India.

The impact on the Indian economy due to the Covid pandemic: Which wave affected the An In-depth Analysis of Unlisted Shares. Budget had announced a Rs 70, crore bank recapitalisation programme to help Public Sector Banks shore up their capital reserves and enhance credit flow into the economy. Let's take a look at what Bank Recapitalisation is and why is it needed. What is Bank Recapitalisation? Bank recapitalisation, means infusing more capital in state-run banks so that they meet the capital adequacy norms.

The government, using different instruments, infuses capital into banks facing shortage of capital. As the government is the biggest shareholder in public sector banks, the responsibility of bolstering banks' capital reserves lies with the government.

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The private sector banks have performed better. The same thing can be said about Indian corporations as well. Most Indian corporations that are listed on the stock exchange are saddled with excessive debt. Most Indian banks are now saddles with these assets. As a result, they are wary of lending money to corporations. On the other hand, corporates are also skeptical of borrowing even though the interest rates are at an all-time low.

This is creating a sort of liquidity crunch. The rate of credit growth has become very slow. As a result, industrial output is declining and the GDP of the nation is taking a hit. As per Basel norms, banks have to write down the loans that they know are not going to be collectible in the near future.

This amount reduces the amount of equity or capital that banks have. The same Basel norms also stipulate that banks must maintain a ratio between the number of loans that they make and the amount of capital that they have on hand.

It is rumored that if Indian banks follow these procedures, more than 11 of the public sector banks will not have enough capital to meet the Basel norms. This will threaten the continuation of their business as a going concern. It is for this reason that there is an urgent need to recapitalize Indian banks. Finance Minister Arun Jaitley has proposed that recapitalization bonds need to be issued to help the banks become Basel complaint once again.

The following steps will have to be undertaken to accomplish the task of bank recapitalization.