Recapitalization of Banks

Recapitalization of Banks

In a recent working paper released by RBI, the balance between the benefits to banks from the recapitalization of banks by the government and reduction in government expenditure in the social sector has been emphasized.

  • In this working paper of RBI, in view of the “Black Swan Event”, a cautious approach to recapitalization of banks has been emphasized.
  • Bank recapitalization refers to infusion of more capital into Public Sector Banks (PSBs), so that they are able to meet the capital crunch as well as comply with Basel norms. The Reserve Bank of India (RBI) has set capital adequacy norms for banks based on Basel norms. This step is mainly taken to ful-fill these guidelines of RBI.
  • Under this process, the government infuses capital into banks by buying new shares of PSBS or issuing bonds. The Government of India is also the largest shareholder in PSBs.
  • Most of the public sector banks often struggle to deal with the problem of NPAS (Non-Performing Assets). In such a situation, the government keeps on announcing recapitalization from time to time to keep the banks from sinking.
  • Earlier, in October 2017 and 2019, bank recapitalization programs were announced.

Key findings of this working paper of RBI:

  • Offering better and discounted lifetime benefits to companies or firms through these recapitalization packages can have their advantages. But, due to this, poor families may have to suffer the loss of government spending in social sectors.
  • Therefore, in the working paper, the need to balance this pros and cons in public policy making has been emphasized.

Source – The Hindu

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