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Govt. to announce recapitalisation of public sector banks (Relevant for GS Mains Paper III)

The Centre is likely to announce the first tranche of the Rs 25,000 crore capital infusion for public sector banks (PSBs), planned for this financial year (2016-17). The first tranches could add up to about Rs.10,000 crore.

State of bad loans
Gross bad loans, as a proportion of the total advances by these banks, rose to 7.6 per cent, a 12-year high in March 2016, according to the Reserve Bank of India’s latest financial stability report.  

Need of recapitalization of banks
On the rise since 2012, impaired assets in the banking system are negatively affecting credit supply and are a factor dampening India’s growth outlook, global rating agency Moody’s Investors Service recently said.PSBs account for about 70 per cent of the total banking system assets. Their total loss in fourth quarter of 2015-16 was Rs. 18,000 crores.

The recapitalisation is aimed at shoring up the PSBs lending capacities that are restricted by poor asset quality and weak capitalisation.

Extent of recapitalisation
Govt. disbursed a total of Rs 25,000 crore to 21 PSBs in the last financial year, 2014-15.Credit assessment agency Moody’s has said that the 11 PSBs it rates would need capital of about Rs 1.2 lakh crore until 2020.

Criticism of recapitalization
It is said that government is using tax payer’s money to pay banks for bad loans given by them. Even worse, these bad loans are mostly on account of misuse of funds by rich people.



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