FREE E-BOOK

Recapitalisation of
Banks
For Descriptive Answer Writing

For RBI Grade B Exam

Recapitalisation-of-Banks Free RBI Grade B e-book

Recapitalisation of Banks
For RBI Gr. B Descriptive Answer Writing
Recapitalisation of Banks is injecting additional capital into state-owned banks to bring them
up to capital adequacy standards.

The government injects capital into banks that are short on cash using a variety of
instruments.

All commercial banks have to meet certain capital adequacy requirements specified by the
Reserve Bank of India (RBI) which are based on Basel norms.

What is Recapitalisation of Banks?

• It entails injecting more capital into state-owned banks in order for them to achieve
capital adequacy requirements.

• The requirement for Indian public sector banks to maintain a Capital Adequacy Ratio
(CAR) of 12 per cent has been underlined by the Reserve Bank of India in line
with BASEL norms.

• The capital-to-risk-weighted-assets-and-current-liabilities ratio (CAR) is the ratio of a

bank's capital to its risk-weighted assets and current liabilities.

• The government injects capital into banks that are short on cash using a variety of
instruments.

• Because the government is the largest stakeholder in public sector banks, it is the
government's responsibility to increase capital reserves.

• The government injects capital into banks by issuing bonds or buying new shares.

• In 2017, the government announced an Rs. 2.11 Lakh crore recapitalisation package
for the public sector Banks.

Why is Recapitalisation Needed?

• The government, which is also the largest shareholder, pours capital into banks by
either buying additional shares or issuing bonds in accordance with RBI
requirements.
Recapitalisation-of-Banks Free RBI Grade B e-book

• As state-run banks struggled to deal with rising nonperforming assets (NPAs), the
government announced recapitalizations from time to time to keep the banks viable.

• In terms of asset size, state-run banks account for 70% of the entire market share in
the Indian banking industry.

• Bank recapitalization is "essential" for the country's economic revival.

• To allow banks to fulfil Basel III's higher regulatory capital requirements.

• PSBs' gross nonperforming assets (NPAs) increased to 12.47 per cent in March 2017
from 4.72 per cent in March 2014.

Recapitalisation in India

In India recapitalisation is achieved in 3 major ways:

• Budgetary Allocation
• Market borrowings
• Issue of recapitalisation bonds

Budgetary Allocation

Budget 2021 allocated Rs.20000 crore and Budget 2020 allocated Rs.7000 crores for bank
recapitalisation.

Market Borrowings

In 2017, the government announced that the banks will raise Rs.10312 crores from the market
as shares and bonds to recapitalise banks.

Recapitalisation Bonds

• Banks subscribe to bonds issued by the government. As the government raises its part
of equity ownership, the money collected by the government is used to shore up
banks' capital reserves in the form of equity capital.

• Banks' money invested in recapitalisation bonds is classified as an investment that

pays interest. As a result, the government is able to stick to its budget deficit target
because no money is taken directly from its coffers.

• Between January 2018 and March 2020, banks were issued recapitalization bonds in
tranches.
Recapitalisation-of-Banks Free RBI Grade B e-book

Special Zero-Coupon Recapitalisation Bonds

• These are unique bonds issued by the central government to a specific institution.

• Nobody else, only those banks, who are designated, can invest in them.

• It is neither marketable nor transferable. It is restricted to a single bank and is only

valid for a short time.

• There is no coupon, it is a zero-coupon, it is issued at par, and it will be paid at the end
of the term.

• The interest that an investor receives on a bond is known as a coupon.

• According to RBI requirements, it is held under the bank's Held-To-Maturity (HTM)

category.

• HTM securities are purchased with the intention of holding them until they mature.

• These are products that are similar to recapitalisation bonds but serve the same
objective, and they are issued in accordance with RBI regulations.

• The issuing of these special bonds will have no impact on the fiscal deficit while also
providing the bank with much-needed equity capital.

• For instance, Punjab & Sind Bank will be recapitalized by issuing Special Zero-Coupon
Recapitalisation Bonds worth Rs. 5,500 crores.

Advantages of Recapitalisation

• It will increase lending and, as a result, growth, as well as increase tax collections and
partially reduce the fiscal deficit.

• In 2-3 years, the capital infusion in PSBs will lower loan rates, boost aggregate
demand, put idle industries to work, and stimulate investment.

• When the economy improves, the government can gradually convert these recap
bonds into regular G-secs and sell them on the open market.

• It will make it easier for banks to raise equity capital.

• Viability Ratings (VRs) have been reduced multiple times in the last three to four
years, and a capital infusion will help to alleviate the downward pressure.

• It will assist banks to enhance their financial risk profiles and meeting Basel-III
regulatory capital requirements.
Recapitalisation-of-Banks Free RBI Grade B e-book

• It also acts as a buffer against an increase in provisioning for non-performing assets

that is envisaged (NPAs).

Drawbacks of Recapitalisation

• Fiscal Deficit: Due to the government's obligation to meet strict budgetary deficit
goals, recapitalization will be challenging.

• Recap is not the solution for Bad Loans: Recapitalization will not result in the
repayment of bad debts.

• Moral Hazard: While banks know the government will step in to aid if the loans go
bad, they may not take necessary measures when lending.

• Interest Payments: Centre could end up paying about ₹1.2 lakh crore as interest on
recap bonds over the five fiscals (starting FY21)

Recapitalization cannot be the only solution to address the bad books of the banks.

It is critical that the financial reforms are appropriately ordered and implemented in a timely
manner.

The government should aim to take an approach that minimises the risks of encouraging
private actors in the banking sector while also improving the efficiency of public sector banks.
Recapitalisation-of-Banks Free RBI Grade B e-book

RBI Grade B Phase-II Courses by Oliveboard

Oliveboard provides RBI Grade B Phase II exam preparation courses that meet all your
preparation needs. We are here to help you if you're aspiring to pass the RBI Grade B exam
and are not sure how to proceed.

Enrol for the Online Course Here

Connect with us on:

• Telegram
• Discuss Forum
• YouTube
 FREE Ebooks Current Affairs
Download Now Explore Now

FREE MOCK TESTS + TOPIC TESTS + SECTIONAL TESTS

For Banking, Insurance, SSC & Railways Exams

Web APP

BLOG FORUM

Your on-stop destination Interact with peers & experts,

for all exam related exchange scores
information & preparation & improve your preparation.
resources.

Explore Now Explore Now

www.OliveBoard.in