Finance Minister Arun Jaitley on Tuesday announced a Rs 2.11 lakh crore recapitalisation programme for public sector banks meant to address the impact of growing bad loans on banks' books.
"To improve the lending capacity of the banks, we have announced the recapitalization programme, which is essential to increase public spending on infrastructure, and that expenditure on infrastructure", said Finance Minister Arun Jaitley at a conference here.
"This milestone announcement on recapitalising banks in one-go is a bold and courageous move and was indeed the need of the hour", said Rajnish Kumar, Chairman of the State Bank of India.
The IMF said in its latest World Economic Outlook that India's economic growth for 2017 and 2018 will be slower than earlier projections. Addressing media, Finance Minister Arun Jaitley said the capital infusion would be done over the next two fiscal.
While banks remain the main source of funding for India's companies, the stubborn bad debt problem has eaten into bank profits and choked off new lending, especially to smaller firms, at a time when an economy that depends on them is stalling.
On Jaitley's claim that the macro economic fundamentals of economy are very strong, he said, "On the contrary, mindless and unsound decisions like demonetisation and the poor implementation of GST has hurt the core of the fundamentals of macro and micro economic fundamentals".
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Banerjee said the government's decision to enhance spending on roads and highways in a strategic manner including port connectivity, border and cross-border roads will have a "big multiplier impact" on economic growth.
People close to Modi have previously told Reuters he wants to control the political damage and ensure the economic slowdown remains temporary.
Of the 2.11 lakh crore, 1.35 lakh crore would come from recapitalisation bond. On fiscal deficit, he said the government is committed to sticking to the target of 3.2 per cent of GDP for the current fiscal but a review would be done in December.
Towards that end, the government issued several tranches of special securities called recapitalisation bonds to nationalised banks, who subscribed to them by paying the government. Finance Secretary Ashok Lavasa said that total government expenditure so far this fiscal has been Rs 11.47 lakh crore out of Rs 21.46 lakh crore budgeted for this financial year. The state banks' scope to sell shares has also been curtailed by a rule requiring the government to own at least 51 percent of the lenders. But they also account for a bulk of the record 9.5 trillion rupees ($145 billion) of soured loans.
The finance ministry said the government continues to work to achieve its deficit target.
Bank stocks rallied ahead of the news conference on expectations of a recapitalisation plan.