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What is bank recapitalisation and how is it done?

Bank recapitalisation, means infusing more capital in state-run banks so that they meet the capital adequacy norms. The government, using different instruments, infuses capital into banks facing shortage of capital.

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Last Updated: Jan 15, 2020, 10.41 AM IST
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Budget 2019 had announced a Rs 70,000 crore bank recapitalisation programme to help Public Sector Banks shore up their capital reserves and enhance credit flow into the economy.

Let's take a look at what Bank Recapitalisation is and why is it needed.

What is Bank Recapitalisation?
Bank recapitalisation, means infusing more capital in state-run banks so that they meet the capital adequacy norms. The government, using different instruments, infuses capital into banks facing shortage of capital. As the government is the biggest shareholder in public sector banks, the responsibility of bolstering banks' capital reserves lies with the government.

Why is such a process needed?
In compliance with RBI guidelines which are based on Basel norms requiring banks to maintain certain amount of capital reserves, the government, which is also the biggest shareholder, infuses capital in banks by either buying new shares or by issuing bonds.

As the state-run banks were struggling to deal with burgeoning NPAs, the government from time-to-time kept on announcing recapitalisation to keep the banks afloat. State-run banks account for 70 per cent of the overall market share in terms of asset size of Indian banking industry.

What are bank recapitalisation bonds?
In October 2017, the then finance minister Arun Jaitley announced a massive Rs 2.11 lakh crore bank recapitalisation programme. Out of the total amount, Rs 1.35 lakh crore were to be mobilised through issuing of bank recapitalisation bonds. The government issues bonds which are subscribed by banks. The money collected by the government goes bank to banks in the form of equity capital as government increases its share of equity holding, thereby shoring up banks' capital reserves. The money invested by banks in recapitalisation bonds is classified as an investment which earns them an interest. This helps the government in maintaining its fiscal deficit target as no money directly goes out from its coffers.

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