DMPQ: . What is the recapitalisation plan for the banks? Discuss the implication of the plan. (Economy)

Recapitalisation plan is a mechanism to deal with the problems of NPA in the financial institutions. It is one of the four R’s to address the issue of NPA’s.  In Oct,17 Centre has announced a 2.11 lakh crore recapitalisation plan for the public sector banks over the next two years. The recapitalisation plan is a three-part package:

  •  Rs. 18000 crore from the budget,
  •  Rs. 58000 crore that banks can raise by diluting their equity and
  •  Rs. 1.35 lakh crore through issuance of recap bonds.

Implications of Issuance of Recapitalisation Bonds:

  • Recapitalisation will not only help banks tackle bad loans but can also be used for fresh credit creation that has remained stagnant for a long period.

 

  • It will also improve the Bank’s asset-debt ratio thereby improving its equity rating in the stock market which is likely to attract its private shareholders.

 

  • The issuance of recap bonds will result in widening of the fiscal deficit. However, being cash neutral transaction, fiscal deficit will only be impacted by the interest cost on the bonds that the government pays every year.
  • Recapitalisation bonds will increase the government’s debt liability by 0.8% of GDP (47.5% in FY17). With no extra government borrowing, the issuance of recapitalisation bonds is unlikely to be inflationary in nature.

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