The Government of India funded six stressed Public Sector Banks (PSBs) as some of them would have breached the minimum capital norms on 31st December, 2017.
These six PSBs include:
- Central Bank of India (received Rs 2257 crores as fund)
- Bank of India (received Rs 323 crores as fund)
- Bank of Maharashtra (received Rs 650 crores as fund)
- UCO Bank (received Rs 1375 crores as fund)
- IDBI Bank (received Rs 2729 crores as fund)
- Dena Bank (received Rs 243 crores as fund)
- Some of these banks were on the verge of breaching the minimum capital requirement which is mandated by the Reserve Bank of India.
- The Government infused the capital in these stressed banks so as to help the banks to improve on parameters such as the bad loans or NPAs.
- These banks were facing problems of NPAs (Non Performing Assets) and were under RBI’s prompt corrective action (PCA) framework.
What are NPAs?
- The bank has assets in the form of money. A customers take money from the banks in the form of loans which is incumbent upon the customer to pay it back.
- When these loans are not recovered from the customers, these loans do not perform for the banks and hence are given the term Non Performing Assets.
- The NPAs are those loans which are not recoverable for the banks.
- Assets are classified as nonperforming when the loan payments have not been made for a continuous period of 90 days. Then the entire deposit is termed as a NPA.
What is Capital Adequacy Ratio (CAR)?
- It is an international standard that measures a bank’s risk of insolvency from excessive losses.
- Currently the minimum acceptable Current Adequacy Ratio is 9%.
- Maintaining an acceptable CAR protects the bank depositors and the financial system as a whole.
- CAR is also known as CRAR (Capital to Risk Assets Ratio).
- CAR mathematically is-
- [(Bank’s Tier I Capital) + (Bank’s Tier II Capital)]/Risk weighted assets
- Tier I Capital of bank- It is the ordinary capital of the bank which can absorb bank’s losses without the bank having to suspend trading.
- Tier II capital of bank- It is the bank’s subordinated debt which can absorb losses if the bank has to shut down.
- Risk weighted assets- These are calculated by evaluating the bank’s riskiness. Each loan is assigned a percentage number. The higher the percentage number, the riskier the loan is.
