CAG flags treatment of bank recap expenditure in FY18-19

cag, frbm, psb, india, bank recap, npas, bad loans

The Comptroller and Audit General (CAG) has raised its concerns over treatment of expenditure of bank recapitalisation during 2017-18 and 2018-19, stating that it was against the provisions of the fiscal responsibility and Budget Management (FRBM) Act.

For recapitalisation of state-run banks, the government provided ₹80,000 crore in 2017-18 and of ₹1.06 lakh crore in 2018-19 respectively.

The CAG has flagged 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.

It said 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 had stated that bank recapitalisation was not fiscally neutral but cash neutral, as issue of securities would get reflected in the total government debt and 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.

The national auditor also pointed out the deficit in operation of the National Small Savings 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.

The CAG pulled up the union government for adopting an erroneous process of devolution of Integrated Goods and Services Tax to states and short-transfer of cesses to reserve funds, which resulted in under-reporting of deficit figures for the 2017-18 and 2018-19 fiscals. The IGST, which is levied on inter-state sale of goods and services, is shared between the Centre and states in the 50:50 ratio.

In its report on the union government accounts tabled in Parliament, the Comptroller and Auditor General of India (CAG) found that ₹13,944 crore was left unapportioned and retained in the Consolidated Fund of India (CFI) in 2018-19, even though the amended IGST Act now provides for a process for ad-hoc apportionment of IGST.

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