Why in news?
The Union Cabinet has recently approved a capital infusion plan for the Public Sector Banks.
How does it work?
- The Centre plans to infuse around Rs. 2 lakh crore capital over the next two years into PSBs.
- This would be partly funded through budgetary allocation and fundraising from the markets and partly by the sale of recapitalisation bonds.
- It is said that the nature of recapitalisation bonds would be decided in the coming months.
- Notably, determining the nature of recapitalisation bonds is essential for dealing with the overall impact of capital infusion on the fiscal deficit.
- As of now the budgetary support will come only from the fund earlier allocated under the Indradhanush scheme for bank recapitalisation.
- Thus it is said that the capitalisation plan would not considerably impact the fiscal deficit.
- Notably, there will be a differential approach to capitalisation based on the performance and potential of banks.
- Banks will have to compete for loans through the revamped udyamimitra.in portal.
- A series of banking sector reforms along with the capital infusion was also hinted at.
What are the benefits?
- India is witnessing a record low growth rate and a poor private investment record.
- The mounting NPAs (non performing assets) has long been an issue of concern with deteriorating capital position of the PSBs.
- The government’s capitalisation package is thus essential for the cash-starved PSBs at this juncture.
- It is expected to enable the banks to lend more freely and also help revive private investment.
- It would also help the PSBs in meeting the Basel III requirements.
- Besides, capital infusion will propel micro, small and medium enterprises through enhanced access to markets and better funding.
- In all, the capitalisation drive can boost the economy, spur investments and create jobs.
Quick Facts
Recapitalisation bonds
- Recapitalisation bonds were sold in 1990s to recapitalise banks.
- The government issued these bonds to the nationalised banks which subscribed them in the normal course of their business.
- The capital thus raised was used by the government to infuse fresh 'equity' into the cash starved banks.
- The idea is to borrow from the banks themselves and boost the weaker banks’ capital, without an immediate demand for direct government budgetary support.
- Globally, the practice is to not include bonds in the fiscal deficit calculation. But in India, it is included as part of the deficit.
- The effect on the fiscal deficit will thus depend on the nature of the bonds and also how they are dealt with.
Basel III
- Basel III guidelines introduced in 2010, were in response to the financial crisis of 2008.
- The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
'Udyami Mitra' portal
- This portal was launched by the Small Industries Development Bank of India (SIDBI) to improve accessibility of credit for the MSMEs.
- It helps MSMEs for submission of loan applications and following up the processing.
- It aims at bringing in transparency in processing of loans by the banks.
- Under the new capitalisation plan banks will have to compete for loans through the revamped udyamimitra portal.
Source: The Hindu, BusinessLine