Concerns raised by the CAG over the treatment of bank recapitalization expenditures

Concerns raised by the CAG over the treatment of bank recapitalization expenditures

Sushmita Goswami | Nov 30, 2021 |

Concerns raised by the CAG over the treatment of bank recapitalization expenditures

Concerns raised by the CAG over the treatment of bank recapitalization expenditures

The Comptroller and Audit General (CAG) expressed concern over the treatment of bank recapitalization expenditures in 2017-18 and 2018-19, claiming that it violated the fiscal responsibility and Budget Management (FRBM) Act.

The government invested Rs 80,000 crore in 2017-18 and Rs 1.06 lakh crore in 2018-19 for recapitalization of state-run banks, respectively.

The above-mentioned expenditure on recapitalisation of the PSBs had been netted against receipts from the issue of special securities in the expenditure budget, whilst receipts from the securities had been netted against expenditure on recapitalisation in the receipt budget. The government raised funding for these investments over the course of two financial years by issuing non-transferable special securities to the same PSBs.

According to CAG, the finance ministry remarked on the matter that bank recapitalization is not fiscally neutral, but rather cash neutral, because the issuance of securities will be reflected in the overall government debt. Furthermore, when coupon payments for special securities are made, the deficit for the relevant year is shown.

In 2017, the concept of recapitalization bonds was introduced for the first time. Previously, capital infusions were made by the government to a bank via cash outflows from the Consolidated Fund of India, putting fiscal strain on the government. The government issued recap bonds in 2017.

The government issues recapitalisation bonds to a public sector bank in need of capital under this programme. Banks, in turn, purchase the bond from which the government receives the funds. The funds obtained are being used to increase the bank’s equity capital. As a result, the government will not have to pay anything out of its own cash.

Apart from that, the CAG also pointed out a problem with the National Small Savings Fund (NSSF), which includes all small-savings plans. “The NSSF balances do not expressly disclose the fund’s huge accumulated deficit, which the government will have to make good on in the future. There is also insufficient disclosure that considerable amounts from the NSSF were used to fund government revenue expenditures that would have to be covered by budgetary assistance. It also raised concerns about shortcomings in the FRBM guidelines’ disclosure.

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