Recapitalisation is described as a strategy of enhancing the financial base of an entity to overcome a rough financial situation or to enhance its financial health. From the practical angle, capital is the money put by the owners for the running of the enterprise. Hence, recapitalization is the venture of the owner/shareholders to make the firm financially strong.
Recaptialisation of PSBs
In the case of Public Sector banks, recapitalization is injection of capital mainly through equity investment by the government to financially strengthen them. Since the government is the majority shareholder of PSBs, the responsibility of adding capital to them falls on the shoulders of the government.
Recapitalisation was necessary because the PSBs are facing financial problems and they need money in the context of rising bad debts. Similarly, they need funds to meet the higher capital requirements under Basel III norms. Altogether, there are following three sound reasons for recapitalization of PSBs.
1. Rising volume of bad assets has led to erosion of capital.
2. The Basel III capital norms requires higher capital in banks.
3. Expanding credit needs in the economy can be made only with higher capital.
The compelling need for large scale recapitalisation is the first factor ie., rising volume of bad debts. Higher NPAs and very low asset quality including the problem of loss asset requires replacing such funds by using money from the capital base. As per the 2017-18 trend, PSBs account for nearly 90 per cent of Gross Non-Performing Assets (GNPAs) of the entire banking sector. According to the CAG Report, GNPAs of PSBs increased from Rs 2.27 lakh crore (31 March 2014) to Rs 6.83 lakh crore (provisional) as on 31 March 2017. This has again estimated to be increased to Rs 8.2 lakh crores as on July 2017. So, the main thrust of government’s recapitalization effort is to tide over the bad debt problem of PSBs.
Recapitalization efforts by the government
The Government has been making recapitalization by providing funds through the budget in the past. A significant portion of the money obtained from disinvestment was put into PSBs for recapitalisation. According to the Comptroller and Auditor General’s Report (2017), the government had infused Rs 1,18,724 crore in PSBs between 2008-09 to 2016-17. Second wave of recapitalization of Rs 2.11 lakh crores was announced by the government on October 24, 2017.
Remarkably, recapitalisation is backed by corrective or supportive measures by the bank management and employees. For this, government is signing a triparty memorandum of understanding with bank management and employee unions.
Table: recapitalization of PSBs since 2008-09
Recapitalisation in Rs crores
Source: CAG Report on Recapitalization, 2017
Recapitalistion effort announced by the government in 2017
The government has announced a major Recapitalisation drive on October 24, 2017 by utilizing three channels – budget, market borrowings and issue of recapitalisation bonds. As per the plan, a total of Rs 2.11 trillion will be injected into the PSBs so that they can meet the stressed asset problem at the earliest. Following are the three modes of fund mobilization under this recapitalization effort.
- Budgetary allocations: government will buy Rs 18,000 crore worth of public sector bank shares.
- Market Borrowings: PSBs will mobilise Rs 58,000 crore from the market through borrowings.
- Recapitalisation Bonds: Government will issue Bank Recapitalization Bonds worth Rs 1,35,000 crore which will be used to buy more shares in public sector banks.
The latest Recapitalisation effort of Rs 2.11 crores will rejuvenate the banking sector. This will help banks to extend fresh credits and to sort out the stressed asset problem to an extent. At the same time, recapitalisation is not indiscriminate as banks themselves must commit performance improvement measures by signing memorandum of understanding with the government.
Memorandum of Understanding
For recapitalisation, a triparty Memorandum of Understanding has to be signed between the Government, PSB management and the employee unions for making recapitalisation performance based.
Already, 11 PSBs have signed MoUs with Department of Financial Services (for performance linked capital infusion) since 2012 for improving their performances while obtaining the 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.