Banking Central | Has bank recapitalisation run its course?

Government has infused significant funds in PSBS over the last decade

• Govt recapitalised PSBs with over Rs 3 lakh crore from 2015 to early 2020s.
• Recent budgets cut capital allocations as PSBs' profitability and asset quality improved.
• Budget 2026 may limit recapitalisation to emergencies only.

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For nearly ten years, public sector bank recapitalisation has been one of the Union government’s most consequential policy choices. It did not make headlines the way loan waivers or tax cuts did, but it quietly kept the banking system afloat at a time when stressed assets threatened to choke credit and confidence.

Ahead of the 2026 Budget, the question is no longer about how much capital PSBs need, but whether the era of routine recapitalisation should finally close.

Between 2015-16 and the early 2020s, the government injected more than Rs 3 lakh crore into public sector banks. The turning point came in 2017, when recapitalisation bonds were deployed on a large scale to shore up capital without blowing a hole in the fiscal deficit. The objective was straightforward: allow banks to recognise bad loans honestly, meet regulatory capital norms and continue lending to a slowing economy.

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That objective was largely met. Asset quality improved, capital adequacy ratios stabilised and the wave of bank mergers helped consolidate weak balance sheets. By the time the pandemic hit, PSBs were in a far stronger position than they had been just a few years earlier. Post-Covid, profitability improved sharply, helped by lower NPAs, better recoveries and a benign credit cycle.

This is why recent budgets have quietly stepped back from large capital allocations for banks. Capital infusion has shifted from being a fiscal necessity to a conditional option. The message from North Block has been clear: public banks are expected to fund growth through internal accruals and market borrowing, not repeated calls on the taxpayer.

Budget 2026 will test how firmly that line holds. Credit demand is rising, infrastructure financing needs are large, and PSBs still dominate lending to priority sectors. Yet fiscal constraints are tighter, and there is little appetite for writing fresh recapitalisation cheques unless the system shows visible stress.

The lesson of the past decade is not that recapitalisation was excessive. It was necessary. But necessity cannot become habit. If PSBs, after years of public support and reform, still require routine capital from the budget, then the problem is no longer capital — it is governance.

Budget 2026 should treat recapitalisation as an emergency tool, not a standing provision. After ten years of support, public banks must prove they can grow, compete and manage risk without leaning on public money.