CAG flags concerns over treatment of bank recap expenditure

For recapitalisation of state-run banks, the government made an investment of Rs 80,000 crore in 2017-18 and of Rs 1.06 lakh crore in 2018-19 respectively.

Audit noticed that in the expenditure budget the above mentioned expenditure on recapitalisation of the PSBs, had been netted against receipts from issue of special securities, while in the receipt budget, receipts from the securities have been netted against expenditure on recapitalisation. Added that during the two financial years, funds for these investments were raised by the government through issue of non-transferable special securities to the same PSBs.

According to CAG, the finance ministry on the issue had stated that bank recapitalization is not fiscally neutral but cash neutral, as issue of securities would get reflected in the total government debt. Besides, coupon payments for the special securities when made would be reflected in the deficit of the relevant year.

The concept of recapitalisation bonds was first introduced in 2017. Earlier, the capital infusion was to done by the government to a bank through cash outgo from the Consolidated Fund of India led to fiscal pressure.In 2017, the government had introduced recap bonds.

Under this, the government issues recapitalisation bonds to a public sector bank which needs capital. In turn, banks subscribe to the bond against which the government receives the money. Now the money received goes as equity capital of the bank. So the government doesn’t have to pay anything from its pocket.

This apart, the CAG also pointed out the deficit in operation of the National Small Saving Fund (NSSF), which comprises all collections of small saving schemes. “The balances under NSSF do not explicitly disclose the substantial accumulated deficit in the fund, which would have to be made good by the government in the future. There is also inadequate disclosure that significant amounts were being provided from NSSF for funding revenue expenditure of the government which would have to be serviced through budgetary support. It also raised concerns over inadequacies in disclosure under the FRBM rules.