agencies
New Delhi, Oct 24: The government Tuesday announced its decision to recapitalise banks by infusing Rs2.11 lakh crore over the next 2 years. Addressing a press conference here after a Cabinet meeting in the morning, Finance Minister Jaitley said: “The decision to recapitalise public sector banks with 2.11 trillion rupees will address the bank balance sheet problem and push growth forward.”
He said the infusion of funds would enable Public Sector Banks (PSBs) to lend more at reasonable rates which in turn would boost the economy.
The FM added that GDP growth was poised to take off and has been around 7.5 per cent in the past three years. The IMF forecast is also of 8 per cent growth rate.
On where the funds for recapitalisation would be derived, Jaitley said: “Of Rs2.11 crore, Rs1.35 lakh crore will come from recap bonds, while 76,000 crore will be pooled in from other sources.”
The finance minister said that apart from infusing this huge amount, the government will carry forward reforms in the banking sector to check indiscriminate lending which created Non Performing Assets (NPAs). The finance minister said a series of steps were being taken to sustain the momentum of growth in the country.
He said macroeconomic fundamentals of the country were strong enough to face challenges.
However, India, once the world’s fastest-growing major economy, has seen its growth rate plummet to the lowest in three years, far below levels needed to create enough jobs to absorb the million Indians joining the workforce every month.
The government tried to respond to the slowing by stepping up public spending, but the slowdown has stressed its finances, making it imperative for private investment to pick up the slack.
Officials privately admit they have struggled to revive private investment because state-owned banks, which provide much of the credit in the economy, are saddled with a mountain of bad debt that has cramped them for space to offer new credit.
According to the finance minister, the decision to recapitalise PSBs is meant to clear that bottleneck. By some estimates, banks need as much as $65 billion in additional capital by March 2019 to tide over NPAs to meet new regulatory capital requirements.
Against this backdrop, the official announcement of recapitalisation, which was followed by a series of tweets from government ministers holding it up as “unprecedented”, comes after a flurry of activity in the government over the past few weeks, driven by the prime minister’s office.
Mohan Guruswamy, an economist in New Delhi, however, said the government should have taken action three years ago to revive the banking sector.
“Now it’s more expensive, and we will not see results soon,” he said.
It was not immediately clear what the impact of the recapitalisation would be on the country’s fiscal deficit, which Jaitley aims to keep at 3.2 per cent of GDP for the current fiscal year to March.
“India’s banking was the weakest link in the revival of the economy,” said NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a Delhi-based think-tank partly funded by the finance ministry. “The government should complete the process as early as possible,” he said and added that the move might have an impact on the government’s fiscal deficit target this year.
Twenty-one state-run banks account for more than two-thirds of India’s banking assets. But they also account for a bulk of the record Rs9.5 trillion in NPAs. In addition to repairing their balance sheets, the banks need billions of dollars in new capital to meet global Basel III banking rules, due to fully kick in by March 2019.
Bank stocks rallied ahead of the news conference on expectations of a recapitalisation plan. The state bank index closed 3.8 per cent higher.
