Refers to injection of capital through equity investment by government to financially strengthen PSBs.
Government’s Plan: Infuse capital through Recap Bonds + Budget Support + Equity Capital from Market.
Rationale: Improve Balance Sheets + Meet Capital requirements under PCA + promote GDP growth.
Recap Bonds: The government issues recapitalisation bonds which would then be bought by the banks. This money raised by the government is then used to buy the shares of the public sector banks leading to increase in Bank’s Capital. The money raised by the Government through the issuance of Recap Bonds is not accounted for calculation of Fiscal Deficit. However, it is considered for the calculation of Internal Debt of Government.
Trends in Recapitalisation: Over Rs 2.5 lakh crores has been infused into Public Sector Banks (PSBs) through recapitalization bonds over the past three years - Rs 80,000 crores in 2017-18, Rs 1 lakh crores in 2018-19 and Rs 65,000 crore in 2019-20.
Recent Developments: The Government has issued Zero Coupon Recap Bonds for the first time in 2020. The Zero-Coupon Recapitalization Bonds will have non-SLR status and will be non-tradable.
Lazy Banking
To get out of the present economic recession, there is a need to enhance credit creation by the Banks. However, "Lazy Banking" by the Banks in India can derail the economic revival.
Details
The depositor’s money mobilised by the Banks can be used either to invest in G-Secs or provide loans to different sectors. Presently, the Banks are reluctant to give loans due to the fear of increase in NPAs. Hence, on account of this, the Banks are investing more money in the risk-free G-Secs. This is referred to as 'Lazy Banking".