Below are the key points
Recapitalization Bonds – The Rs 1.35 lakh crore will come from the sale of recapitalization bonds and the rest through Indradhanush plan and fundraising from the market. Similar bonds were issued in the 1990s to recapitalize the banks through a cash neutral route. Banks issued rights to the government which in turn sold bonds to the banks. However, the government has not given details on recapitalization bonds.
Capital adequacy ratio to improve - The recapitalization plan will put some fresh breath in the PSU banks. The PSU banks have been struggling with poor capital adequacy ratio. The ambiguity on the availability of capital for PSU banks has been a constraint in resolving the NPA issues. The recapitalization plan will provide the capital to the banks to meet the capital adequacy ratio under Basel III norms.
NPA resolution to accelerate – The reported NPA of the banks stood at Rs 8 lakh crore in FY2017 and the number is continuously rising, especially in PSU Banks. The recapitalization program will allow banks to take the haircuts where needed to achieve the resolutions and thereby release the capital from bad loans from FY19.
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