Effect of Recapitalization on the Performance of Public Sector Banks: The Case of India

Abstract

The Government of India recapitalized the public-sector banks with INR 22,915 crores and INR 2, 11,000 in the year 2016 and 2017 respectively. The Government intends to reduce the NPA level and infuse capital into the public sector banks to meet the liquidity standards. The study has been undertaken to analyze the effect of recapitalization on the performance of Indian public sector banks. The study considered two different events (July 19, 2016 and Oct 24, 2017) and used paired sample t test to analyze the effect of recapitalization on public sector banks. Overall the study found significant difference in Earnings per Share (EPS) and Net non-performing assets (NPA (%)) of selected public sector banks during pre and post announcement of recapitalization. However, the study found no significant difference in performance of Nifty PSU stock index during pre and post recapitalization announcement. Thus, Recapitalization has a greater potential to reduce the NPA of banks and earnings quality of Indian banking sectors. However, the government and RBI must take necessary policy reforms and prevention measures to enhance the profitability of public sectors banks and economic growth of the country.