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.
