Video Summary

[LSTV Public Forum] Bank Recapitalisation Plan

This step may prove to be the mega turn around point for the Indian economy as the decision to infuse this capital in PSU Bank will help revive private sector investment.
By IT's Video Summary Team
November 04, 2017


  • What was the need for this step of recapitalisation?
  • How will recapitalisation benefit?
  • Concerns towards the banking sector and recapitalisation
  • Reasons for rising NPA’s
  • What can be done to tackle these bad loans?
  • Steps taken by the government
  • Solutions
  • Conclusion

Bank Recapitalisation Plan [LSTV Public Forum] 

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GS (M) Paper-2: “Government policies and interventions for development in various sectors and issues arising out of their design and implementation.”
GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”



The government has announced 2.11 lakh crore of capital infusion for the NPA hit public sector banks over a period of two years.

What was the need for this step of recapitalisation?

  • The PSU banks command the lion’s share of the loans and deposits in the Indian banking system.
  • The condition started worsening two years back, but the government needs to think deliberately before taking such decisions.
  • More than a decade back, the goal was set to reach the 10% growth so the banks started lending to the industries for long time but this growth was not achieved.
  • By the time when the growth started coming down and the goal wasn’t materialised, the bank loans started creating the NPA situation which has worsen now.
  • 70% of the lending is being done by the PSU Banks in India and the 70% of NPA’s are all against the PSU’s.
  • So the PSU Banks are now having 7.33 lakhs crore worth of NPA’s on their book which the bank cannot escape from.
  • The banks are not in the position today to lend and the private sector investment has dried up coupled with lowering growth rate.
  • Hence the conditions are as such that the government has to take such decisions.

How will recapitalisation benefit?

  • The move could provide respite to a banking sector whose total Gross NPA in March 2017 were equivalent to 5% of the country’s GDP.
  • This step may prove to be the mega turn around point for the Indian economy as the decision to infuse this capital in PSU Bank will help revive private sector investment.
  • Recapitalisation will strengthen the balance sheet of the banks so now it will require to identify the areas where the lending would be profitable and boost the growth.
  • The government will provide 2.11 lakh rupees to these banks from which, 1.3 lakh crore rupees will come through bonds and remaining part will come from equity dilution & budgetary support. This will bring banks in a much better position to handle the past NPA’s, and give loans to the private sector industries.
  • It is expected that the plan will push the credit growth and give desired impetus to MSME’s for jobs and growth.

Concerns towards the banking sector and recapitalisation:

For recapitalisation:

  • Is this step of recapitalisation for the purpose of growth or for managing the increasing debts is a matter of concern.
  • The capital cost of recapitalisation will be 8% through these bonds then from where will government get it if it is set off for NPA’s.
  • This will create the dead assets again in trying to clean the balance sheet.
  • It is not an option. There are Basel-III norms to come from 2019 for which RBI clearly came out with the fact that 9% cash reserves (CR) would be needed. After demonetisation large amount of cash reserves have come in to the banks now and the requirement for CR is more now.
  • By raising the bonds is not the right way for recapitalisation as it will increase the fiscal deficit. The tax payer’s money will be used to liquidate the NPA’s.
  • As far as credit creation is concerned, banks are already flooded after demonetisation and they don’t need further funds for it.

For banking sector:

  • There is need for bank to play a proactive role as it is not the lack of money, resources or perceptions.
  • It is matter of will that, are the banks willing to give the loans to the sectors which do require them like education sector.
  • Banks are not lending in the sectors which are in dire need of it and instead they give it to the RBI to get the safe returns and keep the balance sheet safe.
  • There is also a lack of understanding between banks and RBI.
  • The issue of financial inclusion is still on, after these many decades of independence and large number of persons are out of the reach of this banking system.
  • PSU bank cannot work on the bench mark of private sector and also work as per the government requirements.

Reasons for rising NPA’s:

  • There is a lack of accountability and not the question of government’s will, as the banks are not questioned for whatever loan is given out.
  • When bank official knows that government will give bail out packages then they will not work to solve this problem of NPA.
  • The bailout packages were desired initially during independence and when banking sector was revamped but not in present time.
  • Today there are ways of financing and efficient management, then question arises that why these banks are not pushed to get bad these loans fulfilled.
  • When there are some loan waiver for the huge population almost 70% i.e. engaged in agriculture, there are huge cry, in contrast lakhs of crores of rupees are distributed in platters.
  • It is also not a sectorial issue as it is a handshake between a bank and wilful defaulter which government needs to nab instead of rewarding the waiver through tax payers hard earned money.
  • So there are the problems of banking system and the way they are handled that creates these NPA.

What can be done to tackle these bad loans?

  • There should be a growth plan and a well balance between banks and RBI.
  • Banking sector should be revamped internally as well and the government should come up with strict plans for efficient capital management.
  • There should be well defined and strict guidelines from RBI and government for the banks to ensure the efficient capital management through proper returns.
  • Make the bank board’s accountable and appoint the officials in a completely transparent manner for efficient person to be selected.
  • Actions should be taken against the defaulters by government and banks.
  • These PSU banks needs the framework to deal with the NPA situation like haircuts, restructuring etc., which would improve their balance sheet for NPA.
  • Though the government took the regulatory & empowering steps but beyond that unless these banks are strengthened they won’t be able to handle this NPA situation.

Steps taken by the government:

  • The government came out with Bankruptcy Code Law, through National Company Law Tribunal (NCLT) the NPA’s are to be resolved.
  • The powers were accorded to the RBI to go in to mechanisms that can help banks to deal with NPA’s.


  • Banks need to be independent as they have more than 100 years of experience for being self-sufficient, functioning themselves.
  • Banks should raise equity, convertible debt, give rights & bonus issue.
  • Empower the bank boards to take bold decisions under the guidance of RBI and strengthen the balance sheets of the banks.
  • There will be banking reforms brought in by the government which is desired to handle this problems.
  • The banks should be consolidated instead of having these many banks, but then it raises the concern of financial inclusion which should be carefully handled.
  • So the big banks after consolidation with increased capacity to lend will handle situation more efficiently.
  • There are secret reserves with the banks which people don’t claim which are given to the government, which can be used without bringing fiscal deficit.
  • The post banks can be used efficiently as they reach almost every town or at least most of the villages for strengthening the banking system and financial inclusion.
  • Efficient capital management system is the one of the most desired thing. Efficacy of capital lending will be more if given in infrastructure, road and power transmission sectors rather than urban sector and power generation sector.
  • Cost of banking to be reduced and competition between banks should be promoted for reducing the monopolistic situations.
  • While banking sector reforms are prerequisite for 100% banking in India, government should not intervene in their functioning.


  • The banks are commercial organisations and not the social sector organisations that the government comes to their rescue.
  • The government needs to find the critical balance between taking steps to make these banks work to further their objectives and also allow them to work independently in an accountable manner.


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