Recapitalisation is described as a strategy of enhancing the financial base of an entity to overcome a rough financial situation or to enhance its financial health. From the practical angle, capital is the money put by the owners for the running of the enterprise. Hence, recapitalization is the venture of the owner/shareholders to make the firm financially strong.
Recaptialisation of PSBs
In the case of Public Sector banks, recapitalization is injection of capital mainly through equity investment by the government to financially strengthen them. Since the government is the majority shareholder of PSBs, the responsibility of adding capital to them falls on the shoulders of the government.
Recapitalisation was necessary because the PSBs are facing financial problems and they need money in the context of rising bad debts. Similarly, they need funds to meet the higher capital requirements under Basel III norms. Altogether, there are following three sound reasons for recapitalization of PSBs.
- Rising volume of bad assets has led to erosion of capital.
- The Basel III capital norms requires higher capital in banks.
- Expanding credit needs in the economy can be made only with higher capital.
The compelling need for large scale recapitalisation is the first factor ie., rising volume of bad debts. Higher NPAs and very low asset quality including the problem of loss asset requires replacing such funds by using money from the capital base. As per the 2017-18 trend, PSBs account for nearly 90 per cent of Gross Non-Performing Assets (GNPAs) of the entire banking sector. According to the CAG Report, GNPAs of PSBs increased from Rs 2.27 lakh crore (31 March 2014) to Rs 6.83 lakh crore (provisional) as on 31 March 2017. This has again estimated to be increased to Rs 9.5 lakh crores as on June 2018. So, the main thrust of government’s recapitalization effort is to tide over the bad debt problem of PSBs.
Similarly, several PSBs are not able to give loans and expand business as they are under the RBI’s disciplinary regulatory policy of Prompt Corrective Action (PCA)Plan. Banks under PCA are having critical illness and there are 11 PSBs under the PCA. Only additional capital will help banks to come out of the PCA Framework and increase their lending activities.
Recapitalization efforts by the government
The Government has been making recapitalization by providing funds through the budget in the past. A significant portion of the money obtained from disinvestment was put into PSBs for recapitalisation. According to the Comptroller and Auditor General’s Report (2017), the government had infused Rs 1,18,724 crore in PSBs between 2008-09 to 2016-17. Second wave of recapitalization of Rs 2.11 lakh crores was announced by the government on October 24, 2017. In December 2018, government announced additional Rs 41000 cores Recaptialisation bond issue in the context of shortfall in bank’s market borrowing and the rising need to bank to save from RBI’s PCA framework.
Remarkably, recapitalisation is backed by corrective or supportive measures by the bank management and employees. For this, government is signing a triparty memorandum of understanding with bank management and employee unions.
Table: recapitalization of PSBs since 2008-09
|Financial Year||Recapitalisation in Rs crores|
Source: CAG Report on Recapitalization, 2017
Recapitalistion effort announced by the government in 2017
The government has announced a major Recapitalisation drive on October 24, 2017 by utilizing three channels – budget, market borrowings and issue of recapitalisation bonds. As per the plan, a total of Rs 2.11 trillion will be injected into the PSBs so that they can meet the stressed asset problem at the earliest. Following are the three modes of fund mobilization under this recapitalization effort.
- Budgetary allocations: government will buy Rs 18,000 crore worth of public sector bank shares.
- Market Borrowings: PSBs will mobilise Rs 58,000 crore from the market through borrowings.
- Recapitalisation Bonds: Government will issue Bank Recapitalization Bonds worth Rs 1,35,000 crore which will be used to buy more shares in public sector banks.
The latest Recapitalisation effort of Rs 2.11 crores will rejuvenate the banking sector. This will help banks to extend fresh credits and to sort out the stressed asset problem to an extent. At the same time, recapitalisation is not indiscriminate as banks themselves must commit performance improvement measures by signing memorandum of understanding with the government.
In December 2018, the government has announced additional issue of Rs 41000 crores recapitalisation bonds. Whether the total recapitalisation amount will go above the Rs 2.11 lakh crores is not immediately clear. The additional bond issue is expected to compensate under realization of banks’ market borrowings (target Rs 58000 crores).
Memorandum of Understanding
For recapitalisation, a triparty Memorandum of Understanding has to be signed between the Government, PSB management and the employee unions for making recapitalisation performance based.
Already, 11 PSBs have signed MoUs with Department of Financial Services (for performance linked capital infusion) since 2012 for improving their performances while obtaining the recapitalisation fund.
From 2014-15 onward, there was a shift from ‘need based’ to ‘performance based’ capital infusion, with return on assets being used as the basic criteria for capital infusion.
The government has launched the initiative of EASE to reform the PSBs along with recapitalisation. EASE – Enhanced Access and Service Excellence, focuses on six themes of customer responsiveness, responsible banking, credit off take, PSBs as Udyami Mitra, deepening financial inclusion and digitization and developing personnel for brand PSB. According to the government, the overarching framework for the reforms agenda is realize “Responsive and Responsible PSBs”.
Progress of Recapitalization
The recapitalization effort was initiate in 2017 itself. Following are the step made by the government in recapitalization of PSBs as part of the 2.11 lakh crore recapitalization programme.
(1) Recapitalization bonds
- Recapitalization bonds total Rs 1.35 lakh crores
- Already issued bonds – Rs 70000 crores in 2017
- Remaining – Rs 65000 crores to be issued in 2018
On 20th December 2018, government decided to issue additional Rs 41000 crores recapitalisation bonds to provide money to PSBs.
(2) Budgetary support
Total budgetary and other market-oriented support is targeted to be Rs 76000 crores (this will be done in two financial year). Of this, the Government is targeting Rs 65,000 crore bank recapitalization plan for 21 public sector banks during 2018-19 financial year. In December 2018, government announced additional issue of Recapitalisation bonds worth Rs 41000 crores. This will make the yearly allocation through Recaptialisation bonds to Rs 1.06 lakh crores. Up from Rs 65000 crores.
As per the initial plan, the PSBs were expected to mobilise Rs 58000 crores from the market. But only Rs 24000 crores has been obtained. Hence, the new bond issue (Rs 41000 crores declared in December 2018) is expected to compensate the unrealized amount of Rs of Rs 34000 crores of banks’ market borrowings.
In July 2018, the government infused Rs 11300 crores into five public sector banks, including Punjab National Bank. As part of the MoU, an agreement for ESOP was signed with the employee unions of PNB.
Additional issue of recapitalisation bonds worth Rs 41000 crores declared in December 2018
The additional recapitalisation bond-based fund infusion is expected to support banks in four dimensions:
- Banks that need to meet minimum regulatory capital norms as per Basel III norms will get funds.
- Better performing banks under Prompt Corrective Action (PCA) will be given capital to meet 9 percent CRAR norm and 6 percent Net NPA requirement to help them come out of PCA.
- Fund will also help Non-PCA banks which are close to red line to ensure they don’t fall into PCA.
- Funds will also help banks to avail regulatory capital for undergoing amalgamation.
As per the Basel III regulation followed in India, banks have to get capital conservation buffer (additional) of 2.5% by March 2020 and recapitalization is the viable option to meet the funds.