Bank Recapitalization in India: A Critique of Public Policy Concerns

Abstract

Public sector banks in India have always been viewed as vehicles of economic and social development. These institutions reach out to people of all sections across the country and offer banking services even if they have to compromise on profitability. Most of the social schemes for poverty alleviations, livelihood, skill development, financial inclusion, etc., are channelized through public sector banks. However, their capability is severely limited due to burgeoning non-performing assets. Considering the importance of public sector banks for the economy of the country, the government often recapitalizes them so that banks may survive the threat of closure. However, bank recapitalization serves as Band-Aid while the underlying sickness continues to spread. This article examines the policy concerns vis-à-vis bank recapitalization and suggests corrective pathways. Factors leading to unremitting capital erosion in banks have been diagnosed and efforts have been made to figure out why previous attempts at recapitalization have failed to strengthen and transform the banking system.