What is bank recapitalization?

Bank recapitalisation, means infusing more capital in state-run banks so that they meet the capital adequacy norms. The government, using different instruments, infuses capital into banks facing shortage of capital.

Why do banks recapitalize?

Bank recapitalization is a method to infuse new and fresh capital into banks to strengthen their balance sheet. To help with the credit flow, the government as well as private institutions use equity and debt instruments to recapitalize the banks. It is very important to ensure the credit growth of the economy.

What is recapitalization of public sector banks?

The government refrained from committing any capital for the PSBs in the Budget 2020-21. Finance Minister Nirmala Sitharaman on Monday said the government will infuse ₹ 20,000 crore into public sector banks (PSBs) in 2021-22 to meet the regulatory norms.

How does a recapitalization work?

Recapitalization is the process of restructuring a company’s debt and equity mixture, often to stabilize a company’s capital structure. The process mainly involves the exchange of one form of financing for another, such as removing preferred shares from the company’s capital structure and replacing them with bonds.

How do recapitalization bonds work?

Under this mechanism, the government issues recapitalisation bonds to a public sector bank which needs capital. So the government doesn’t have to pay anything from its pocket. However, the money invested by banks in recapitalisation bonds is classified as an investment which earns them an interest.

What is Recapitalisation of banks Upsc?

Bank Recapitalisation: It means infusing more capital in state-run banks so that they meet the capital adequacy norms. Indian public sector banks are emphasized to maintain a Capital Adequacy Ratio (CAR) of 12\%. CAR is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities.

What is an add on transaction?

Add-ons are additional shares issued by a company that has already gone public. New units of ownership are created and sold on to investors to raise cash to fund new projects, expand operations or cover current operating expenses.

How does recapitalization work in private equity?

In an equity recapitalization a private equity investor buys out most, but not all, of the owner’s interest in the business. This allows the owner the opportunity to unlock some of the value tied up in the equity of the company and creates a liquidity event for what is probably the largest portion of his/her net worth.