Why in news?
Union government has announced a new recap plan for revival of Public sector Banks.
What is the new plan about?
- Under the recent recap plan, the Centre simply borrows from the banks to meet their capital requirements.
- The Centre will raise money by issuing recapitalisation bonds to public sector banks.
- This money will be funnelled back as equity capital into the same banks.
- In effect, banks get to convert their liabilities into capital to absorb losses and fund their growth.
What is the need for new plan?
- The Centre’s much touted differentiated recap approach is based on the premise that while stronger and non-PCA (Prompt Corrective Action) banks have been given capital to fund their growth.
- PCA banks have been provided with funds to primarily meet their regulatory capital requirement.
- Due to sharp slippages reported by PSU Banks, some of these banks did need the extra cushion to tackle their financial burdens.
- Sharp slippages, mostly out of banks’ restructured accounts has also rightly drawn the RBI’s attention.
What are the concerns with Union government’s move?
- Earlier Union government has announced an infusion of a whopping Rs 88,000-odd crore of capital into ailing public sector banks, which has created furore.
- After all, it was depositors’ money being used to bail out these banks.
- Depositors were irked by the infamous ‘Clause 52’ of the FRDI Bill that empowers the Resolution Corporation overseeing bank defaults to invoke bail-in and cancelling any/all of the bank’s liabilities.
- It is unclear why many banks under PCA have been given capital, way above that needed to just meet the norms.
- Hence, while in the past, the Centre has been pumping taxpayers’ money (ironically also depositors’) into PSU banks.
- This time around, with a bit of financial jugglery, depositors have in effect stepped in to bail out their banks.
Source: Business Line
