Bank recapitalisation and banking reforms finally go hand in hand (2024)

The Reserve Bank of India (RBI) and the finance ministry have been jointly working on the Rs2.1 trillion recapitalisation package for public sector banks. This piece of information released at the RBI governor’s press conference after the monetary policy committee meeting on Wednesday is definitely more important than RBI’s monetary policy review.

Historically, the government (read: the finance ministry), the majority owner of the PSU banks, decides on which bank gets how much capital. In the past, each time the government announced bank recapitalisation, there was extensive paper work and data gathering and extracting promises on performance from the banks but ultimately it all depended on the whims and fancies of the officials of the finance ministry and lobbying of the respective banks. There was no art or science behind the distribution of money.

This is being changed, and changed for the better. This time around, it seems bank recapitalisation and banking reforms will go hand in hand. This means, there will be definite preconditions and only when the banks accept those conditions, they will get their lifeline in the shape of recapitalisation bonds.

Those banks which have relatively strong balance sheets and are doing reasonably well will get the capital in the first round. The laggards will have to make many commitments, including sale of non-core assets and change in focus areas to be eligible for recapitalisation funds.

This is being done to prevent a recurrence of pile in bad assets and yet another round of government bailout, using taxpayers’ money.

Simply put, banks cannot take recapitalisation funds for granted; they will have to earn it. Far too long the Indian government has been too democratic in doling out money to its ailing banks. It’s time to show the door to those banks which are fast becoming irrelevant. The news of the day is not an actionless RBI’s bimonthly monetary policy review, but the Indian central bank’s determination to play an active role in determining which bank will get how much money, and not leaving it to the government’s benevolence.

An extended pause

The bond market heaved a sigh of relief on Wednesday with the RBI’s bimonthly monetary policy review turning out to be a non-event. There was a minor 3-4 basis points rally in the market after the Indian central bank kept its stance of the policy unchanged—neutral.

One basis point is one-hundredth of a percentage point.

No one was expecting RBI to tinker with its policy rate and hence there was no surprise that it has not changed the rate but the relief came from the tone of the policy. It is definitely not more hawkish than the October policy when RBI pressed the pause button. The Indian central bank has made it amply clear that it has no bias and only the flow of data in future will determine the trajectory of the policy. This means, nothing will change too soon (read: the February review) and we are in for an extended pause.

RBI has raised the projection of inflation in the second half of current fiscal year by 10 basis points—from a range between 4.2-4.6% to 4.3-4.7%.

Here, too, there is no surprise—the market has all along been a bit over-ambitious on the inflation front while the central bank remains pragmatic. The growth projection also remains unchanged at 6.7%, keeping in mind quite a few factors including recapitalization of public sector banks and the bulk of money being raised from the primary market. After a sudden slump in the economic growth in the June quarter to a three-year low 5.7%, growth bounced back to 6.3% in the July-September quarter. The Reserve Bank expects 7% growth in the December quarter and 7.8% in March.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. His latest book, From Lehman to Demonetization: A Decade of Disruptions, Reforms and False Promises, will be released in Delhi on 12 December.

His Twitter handle is @tamalbandyo.

Respond to this column at [email protected].

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Published: 06 Dec 2017, 07:38 PM IST

Bank recapitalisation and banking reforms finally go hand in hand (2024)

FAQs

What is the meaning of bank recapitalization? ›

A: Recapitalization refers to the process of infusing fresh capital into public sector banks by the government. It aims to strengthen their financial health, enhance lending capacity, and ensure compliance with regulatory capital adequacy norms.

How do you recapitalize a bank? ›

Recapitalization is a strategy that a company can use to improve its financial stability or overhaul its financial structure. To accomplish this, the company must change its debt-to-equity (D/E) ratio by adding more debt or more equity to its capital.

What are the effects of bank recapitalization? ›

According to Gopar & Eba (2019, 57-58) the benefits of recapitalization in Nigeria include the bigger size of banks which will enhance the capitalization of the banks as well as relatively larger capital extensive projects which may have been ignored due to insufficient capital; the emergence of stronger banks which ...

What did banking reforms do? ›

The Glass-Steagall Banking Act stabilized the banks, reducing bank failures from over 4,000 in 1933 to 61 in 1934. To protect depositors, the Act created the Federal Deposit Insurance Corporation (FDIC), which still insures individual bank accounts.

What happens during recapitalization? ›

Recapitalization occurs when a company adjusts its capital structure, often with the goal of shifting its D/E ratio closer to its optimal capital structure. Such measures are taken by companies to reach their “optimal capital structure” – either to: Maximize Shareholder Value (or) Fix an Unsustainable Capital Structure.

What are the disadvantages of recapitalization? ›

While business owners maintain a say in day-to-day activities and crucial decisions after recapitalization, the recapitalization partners significantly influence the business's strategic and financial decisions. Owners not comfortable giving away the majority stake in their business find it hard to work with partners.

What is the difference between recap and refinance? ›

While refinancing usually refers specifically to the reorganization of a company's debts, recapitalization involves changes to the whole capital structure – including equity.

Is a recapitalization a buyout? ›

Leveraged recapitalizations have a similar structure to that employed in leveraged buyouts (LBO), to the extent that they significantly increase financial leverage. But unlike LBOs, they may remain publicly traded.

What is the difference between acquisition and recapitalization? ›

In an acquisition, the property is new to both sponsor and investor. In a recap, the sponsor already owns the property and is attempting to replace the existing capital structure with a new one using new debt (probably) and new investor finance.

Is recapitalization the same as restructuring? ›

Recapitalization focuses on injecting fresh capital to strengthen a company's financial position, while restructuring involves broader changes to improve operational efficiency and address underlying issues.

Is a recapitalization a reorganization? ›

A single corporation can reorganize under two code provisions. One reorganization (an "E" reorganization) is a "recapitalization." A recapitalization is typically a transaction between a corporation and some or all of its shareholders or creditors.

What are the benefits of bank capitalization? ›

The benefits are related to an increase in bank resilience to adverse shocks. Higher capitalisation allows banks to withstand negative shocks and moderates the reduction of credit to the real economy that ensues in adverse circ*mstances.

What programs dealt with banking reform? ›

Summary of First and Second New Deal programs. The First New Deal (1933–1934) dealt with the pressing banking crisis through the Emergency Banking Act and the 1933 Banking Act.

Which president reformed the banking system? ›

In August 1935, President Franklin D. Roosevelt enacted significant reforms to the Federal Reserve and the financial system, including increasing the independence of the Fed from the executive branch and shifting some powers formerly held by the Reserve Banks to the Board of Governors.

Why are banks heavily regulated? ›

Regulation protects the Fed and the fdic against losses that will occur when it lends to banks that later fail. the payment system in which banks transfer funds among themselves.

Is recapitalization the same as refinancing? ›

What is the difference between recapitalization and refinancing? While refinancing usually refers specifically to the reorganization of a company's debts, recapitalization involves changes to the whole capital structure – including equity.

What is a recap in investment banking? ›

A recap is where business owners can sell a portion of their business to Private Equity (PE) firm/partner.

What is undercapitalization of banks? ›

Undercapitalization occurs when a company does not have sufficient capital to conduct normal business operations and pay creditors. This can occur when the company is not generating enough cash flow or is unable to access forms of financing such as debt or equity.

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