Why Recapitalization required:
- Many PSBs have large amount of NPAs
- The size of NPAs was proving to be an obstacle in extending the credit to MSME sector and other development related projects
- Measures taken by the government in the past proven to be partial such as Indradhanush.
- Tier I capital of many PSB was little above the target level of 11% while some even have lower than the target.
- They were not able to write off/sell NPAs for the fear of inviting CAG attention.
It has called for complete and more aggressive step to address the problem. As outlined, close to 70% of the amount will be front loaded in this fiscal year and it will definitely result in easing the stress on PSB balance sheets.
Will lending increase?
- The modalities of the recapitalization bonds are yet to be detailed by the government which is important in assessing the lending capacity of banks
- Government has strictly said that the recapitalization will be performance linked in order to avoid moral hazard problem. This will force banks to be more prudent in their lending practices unlike in the past.
- As the lending to MSME sector is inherently riskier than the large enterprises, banks are unlikely to lend unless there is a clear directive from the government. However, considering the growth prospects in the economy lending will improve but not as much as envisaged at the moment.
