Fuelling The Growth Engine: Government Plans Rs 41,000 Crore Recapitalisation For PSBs

The government has requested Parliament’s approval for supplementary grants worth Rs 41,000 crore which will be used to infuse fresh capital into the financially-stressed Public Sector Banks (PSBs) in the current fiscal, Mint has reported.

The additional capital can assist five state-run banks to exit the prompt corrective action (PCA) framework. PCA framework was imposed on 11 PSBs between February 2014 and January 2018 by the Reserve Bank of India.

A bank is put under the PCA system by the RBI when its financial health is in peril, and drastic steps are necessary to prevent fallout in India’s economic system. When a bank breaches certain risk thresholds for three parameters - capital, asset quality (which is tracked in terms of the net Non-Performing Assets ratio) and profitability - the central bank moves in to restrict the bank’s lending activities and branch expansion to improve efficiency and conserve scarce capital.

“The recognition of non performing assets (NPAs), a process that started in 2015, is almost complete. The last quarter has already shown that there is improved performance. Therefore, now the downward slide in the NPAs would commence,” finance minister Arun Jaitley told reporters.

The government had planned infusion of Rs 65,000 crores into PSBs through recapitalization of bonds this fiscal. So far only Rs 43,000 crore has been allocated to various PSBs.

It should be noted that NPAs of PSBs have started declining after reaching a peak in March 2018. While total valuetion of NPAs has declined by Rs 23,860 crore in the first half of the current fiscal, the banks have recovered Rs 60,726 crore in the same period. This represents twice the amount recovered in the previous year.

Also Read: Why Corrective Action Can Be A Boon For Faster Turnaround Of Banks