Discuss the merits and demerits of the government's bank recapitalisation scheme.

Published: October 26, 2017

One of the major growth hurdles of Indian economy has been subdued private investment. Public sector banks which have huge presence are under stress due to high NPAs, causing decline in credit growth.
Government has decided to recapitalize the banks with 2.11 lakh crore in next two years
Merits:

  • Public sector banks who are struggling with stressed balance sheet will get relief and step up lending to private sector.
  • It would help them  weather out the provisioning requirements of their toxic loans.
  • It would promote the banks to recognize the losses and aggressively pursue loan recovery, earlier they were hesitant as it would hit their capital ratios
  • Facilitate compliance with Basel III norms for capital requirement.
  • 35 lakh crore will be raised through recapitalization bonds, thus the plan would be cash neutral and hence would not have much impact on fiscal deficit.
  • It will spur investment and thus economic growth

Demerits

  • Real and sustainable growth can be witnessed only when debt issues are resolved and toxic assets are taken off the balance sheets of corporate and banks.
  • Recapitalization may be seen as favour to big companies among the small entrepreneurs and ordinary investors.
  • It may create moral hazard, with more companies defaulting among companies which are struggling to pay off debt.

Way ahead

  • Recapitalisation needs to be backed by governance reforms in banks
  • Public asset reconstruction agency would be apt for resolution of twin balance sheet problem faced by Indian economy.

Recapitalisation is a much needed relief for PSBs to spur growth in the economy

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