Decisive Package - Recapitalisation is a Monumental Step

The Union Cabinet has approved a Rs 2.11-lakh-crore recapitalisation plan for public sector banks over the next two years. Of the corpus, recapitalisation bonds will account for Rs 1.35 lakh crore, while Rs 76,000 crore will be available through budgetary support.

The government's proposed recapitalisation programme will help address banking sector challenges with increasing opportunities for investment and job creation.

For the first time in last decade, we now have a real chance that all the policy pieces of the jigsaw puzzle will be in place for a comprehensive and coherent, rather than piecemeal,strategy to address the banking sector challenges.

The Government of India's decisive package to restore the health of the Indian banking system is in the view of the RBI, a monumental step forward in safeguarding the country's economic future.

The package combines several desirable features, said the RBI governor. “It will involve participation of private shareholders of public sector banks by requiring that parts of the capital needs be met by market funding.

The recapitalisation bonds will be liquidity neutral for the government except for the interest expense that will contribute to the annual fiscal deficit numbers. By deploying recapitalisation bonds, it will front-load capital injections while staggering the attendant fiscal implications over a period of time.

It (recapitalisation) will allow for a calibrated approach whereby banks that have better addressed their balance-sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority while others shape up to be in a similar position.