The role of state has evolved in modern times and it is not only restricted to provide protection and armed forces but to constantly work for the welfare of the nation. From last one and a half year, Indian Govt is continously trying to provide a considerable boost in the banking sector by injecting the desirable amount of capital to improve the balance sheet of the banks.
It is no secret that our banks are facing a serious crisis because of us i.e loan defaulters who don’t like the idea of paying back the money to an institution which is resulting in the rise of non-performing assets in the banking sector. When a bank gives loan, it counts as an asset because it contains the ability to generate some interest from the borrrower but it becomes a non-performing asset when the borrower fails to even repay the original amount and since the government is the major shareholder in the public sector banks, it has to provide equity capital if the banks are struggling to prevent erosion of their capital. It surely does not mean that banks are running out of deposits but they cannot lend it directly to the public as it is a liability for them and they have to maintain a balance between assets and liabilities.
Need
Due to demonetization and other government recent moves to curb black money, banks have got excess deposits with them but alongside with it there is also government move to clean up the balance sheets of PSU’s wherein huge chunk of stressed assets was not recognized as non-performing assets, so this excess deposits are being used to make provisioning for the stressed assets and eventually not letting banks to increase in credit growth.
Importance
This step of recapitalisation,if goes right, will provide banks with enough money to maintain a minimum capital. Itwill further help them to recognize the bad assets and the balance funds will be utilized for credit demand which will eventually lead to higher profitability for banks, increase in consumption and overall revival of the economy. The funding process of this whole plan is quite interesting - the banks which have shown consistent fall in stressed assets over the period of time will get a larger pie of capital and banks which are trying to survive in will get a substantial amount to run the existing business operations.But an idea is merely an idea, there is a need of careful evaluation before drawing any conclusions and like almost other ideas, this one too is not free from loopholes.
