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Bank recapitalisation & sign of recovery by finance commission

The Indian public sector banks (PSBs) are still in the vulnerable condition as per the financial Stability Report (FSR) released by RBI recently. The PSU balance sheet is in severe crisis  before the pandemic and now the condition turned worst , the pendamic have created havoc and the public sector banks are unable to justify their data and balance sheets. As per the financial stability report it is clear that the gross non-performing assets will rise to 15.2% from 11.3%  March 2020  raising the bar 15.2% in March 2021 apart from it , it is estimated to rise to 16.3% under very critical situation. If we talk about CRAR then it is estimated to even fall from 14.6% in March to 13.3% and to 11.8%  in critical conditions. Now the requirement of  recapitalisation is a must need of time to handle such situation.



It is understood that again the governement will opt out the easiest way to help the weak banks to balance their deficit by recapitalization. But there is a need of taking serius initiative to reform the public sector banks rather than balancing their lossesAs per the discussions of the Fifteenth Finance Commission (FFC) and the department of financial services in the ministry of finance  along with RBI  a serious concern was raised that any delay in efective reform will let the complete public sector bank in high debt.



The more important or we can say the soul question in this regards is the role of the Finance Commission in the recapitalisation of banks. The basic task as per the present requirements by the Commission is to address the matters specified under Article 280 (3 a, b, bb, and c) which specify  tax devolution, giving grants in aid of revenues, and measures needed to augment the consolidated funds of the states to supplement the resources of rural and urban local bodies. Recapitalisation of public sector banks or the issue of resolving their stressed assets is not a part of the TOR. However, the Commission’s interest in this may be to consider the recapitalisation requirement as a genuine liability of the Union government while assessing central finances. According to the constitutional assignment, item 38 in the Union List relates to RBI and item 45 relates to banking.



The base question is surrounding the fact that the Commission must consider, it is not whether or not the issue of bank recapitalisation comes within its boundary , but the larger issue of the role of the government itself in resolving the matter. The important questions that need to be answered are,

  •  If market failed then in this case will government take ownership of the banks ?
  • What is the nature of the failure and does it warrant ownership? 


Several committees have given their constant views in this regards :

  • The Narasimham committee in 1998  : Recommended that it is not possible to manage and take ownership and government should select any one of the two
  • The Nayak Committee has gone a step further and recommended dilution of government ownership to 25%.


If we think from the broad spectrum we found that the Finance Commission is not a tax reforms commission, neither an expenditure reforms commission, nor is it a public enterprise reform or banking reform commission. The Constitution envisaged it to be an impartial function  to resolve vertical and horizontal imbalances

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