The finance ministry to infuse additional capital to PSBs through recapitalisation

In news

The government is discussing infusion of an additional capital in public sector banks (PSBs) and might issue recapitalisation bonds, to pump in money without disturbing the fiscal deficit reduction road map.

How?

The extra capital is expected to be generated through sale of non-core assets of the banks and equity infusion by the government via the recapitalisation bonds

Major Issues

Lack of adequate capital in PSBs

What is ‘Recapitalization’?

Recapitalization is restructuring a company’s debt and equity mixture, often with the aim of making a company’s capital structure more stable or optimal. Essentially, the process involves the exchange of one form of financing for another, such as removing preferred shares from the company’s capital structure and replacing them with bonds.

Effects of RecapitalizationRelated image

Generally speaking, when a company’s debt decreases in proportion to its equity, it has lower leverage and thus, ceteris paribus, its earnings per share should decrease following the change; however, its shares would be incrementally less risky, since the company has fewer debt obligations, which require interest payments and return of principal upon maturity. Without the requirements of debt, the company can return more of its profits and cash to shareholders.

Recapitalization in Indian Banks

The Government of India has been infusing capital on a regular basis into the PSBs, to enable them to meet regulatory capital requirements and maintain the government stake in the PSBs at a benchmark level

  • Government’s plan: Discussions are underway to raise capital support by another Rs 20,000-25,000 crore for the PSBs
  • This addition will be in addition of the Rs 10,000 crore provided in the current financial year’s Budget for PSBs’ capitalisation
  • The extra capital is expected to be generated through sale of non-core assets of the banks and equity infusion by the government via the recapitalisation bonds
  • With enough liquidity in the banking system post-demonetisation, lenders are expectedto buy these bonds
  • And the money so raised can be used to provide capital to government banks

Particulars of the proposed bonds

  • The annual interest on these bonds and the principal on redemption will be paid by the Central government
  • And the funds so raised are to be used to capitalise the PSBs

Image result for Recapitalization

 

 

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