Bank recapitalisation monumental step to save economy: RBI chief

The government's Rs. 2.11 lakh crore plan to recapitalise public sector banks is a major step to restore the banking system's health and safeguard the countrys economic future, RBI Governor Urjit Patel said on Wednesday.

"The government's decisive package to restore the health of the Indian banking system is in the view of the Reserve Bank of India a monumental step forward in safeguarding the country's economic future," Patel said in a statement.

He said a well-capitalised banking and financial system was a pre-requisite for stable economic growth. Economic history had shown repeatedly that only healthy banks lend to healthy firms and borrowers, creating a cycle of investment and job creation.

"For the first time in last decade, we now have a real chance that all the policy pieces of the jigsaw puzzle will be in place for a comprehensive and coherent, rather than piece-meal, strategy to address the banking sector challenges. It bodes us well that this step has been taken in a time of sound macroeconomic conditions for the economy on other fronts," he said.

In a stimulus package aimed at boosting flagging economic growth, creating jobs and increasing credit flow, the Cabinet on Tuesday approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks and massive road infrastructure investment of nearly Rs 7 lakh crore over five years.

Of this, Rs 1.35 lakh crore will be raised through recapitalisation bonds and the remaining through budgetary support and market borrowings.

Patel said the proposed recapitalisation package for the banking sector combined several desirable features. 

"First, by deploying recapitalisation bonds, it will front-load capital injections while staggering the attendant fiscal implications over a period of time. As such, the recapitalisation bonds will be liquidity neutral for the government except for the interest expense that will contribute to the annual fiscal deficit numbers.

"Second, it will involve participation of private shareholders of public sector banks by requiring that parts of the capital needs be met by market funding. last but not the least, it will allow for a calibrated approach whereby banks that have better addressed their balance-sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority while others shape up to be in a similar position," he added.

Patel said financial sector policies should support growth while maintaining financial stability.