In a major move to improve credit offtake of the ailing public sector banks (PSBs) and boost economic growth, the Union Cabinet on Tuesday announced a massive recapitalisation plan worth Rs 2.11 lakh crore over the next two to three years.
Out of this amount, a sum of Rs 1.35 lakh crore will be raised through recapitalisation bonds, while the remaining Rs 76,000 crore will come from budgetary support and capital markets, Finance Minister Arun Jaitley said.
“The exact nature of these recapitalisation bonds will be released later and the capital infusion plan may run into the next fiscal year,” Financial Services Secretary Rajiv Kumar added.
At the media briefing, a presentation titled, ‘The India Story: Speeding Up For Take Off!’ highlighted that the economy grew by 7.5 per cent per annum in three years of the BJP’s rule since 2014.
From acknowledging the rise in Non-Performing Assets (NPAs) to various questions on the status of the economy post demonetisation and GST, Jaitley touched upon a range of issues, stating that macro-economic fundamentals of the country were very strong at present.
The Finance Minister said capital infusion would be accompanied by a series of banking reforms which would be spelt out in next few months.
He added that the Union Cabinet decided that a bold step should be taken by the Government to address the problem of ailing PSBs through recapitalisation.
“Part of the Rs 2.11-lakh crore will come from banks raising their own capital, whereas the Government equity in them can come down to 52 per cent. Rs 18,000 crore will come from budgetary resources under the existing Indradhanush scheme. Together these two measures will raise Rs 76,000 crore,” Jaitley said.
“For the last three years, India has been the fastest-growing major economy in the world and our intention is that it remains in that position,” he added.
The economy slowed to 5.7 per cent in the April-June quarter, the weakest pace since 2014, as demonetisation sucked out 86 per cent of the currency in circulation, throwing cash-dependent businesses in disarray and the implementation of GST from July 1 hit small and medium enterprises.
“There was a temporary slippage in growth in the last two quarters thanks to transitional effects of demonetisation and GST,” an official statement said.
That effect, it said, is now over with all indicators like industrial production, core sector, automobile and consumer spending pointing towards “a strong pick up”. “There is expectation of very good growth from the second quarter of the current year itself,” it said.
The money which has been deposited in banks post demonetisation is available for lending, but availability of money doesn’t ensure that it can be lent.
“For that, capital adequacy is needed. And that capital adequacy was eroded because of excessive NPAs and because of the situation of the banks from 2008-2014,” Jaitley said.
He said it was natural that when structural reforms happen, there is some impact for a limited time. “But medium to long-term, there is huge benefit.”
Jaitley said, “The Government’s actions are not limited to addressing capitalisation of PSBs. Definite steps will be taken alongside capitalisation to enable banks to play a major role in the financial system. PSBs with 70 per cent market share in the banking space will be geared for greater growth and to contribute through enhanced credit offtake.”
“Private investment will be further strengthened. Infrastructure instantaneously creates jobs, lending to small and medium enterprises creates job,” Jaitley said.
Macro-economic fundamentals are strong, he said, adding that there was a need to increase public spending. “Infrastructure expenditure is unprecedented in the country. Efforts are on to increase public expenditure in various sectors of the economy like rural roads, highways, Bharatmala, housing and railways.”
Also, the intention is to increase private investment in the economy. “It was one area which had its own challenges. So far we believed that PSBs have done indiscriminate lending at one stake. From 2008-2014, because of indiscriminate lending, a bigger chunk is NPAs,” he said.
On banking reforms, he said, “More reforms will happen to ensure that there is no repetition of the situation that was there in 2014 wherein you lend indiscriminately while hiding the real conditions of those loans. It was only after March 2015 the actual position of banks became clear.”
Jaitley said that banks now have adequate lending capacity post-demonetisation.
Promising a buoyant economy going forward, he added that inflation, this year, is expected to remain below four per cent.
Bad loan of banks had increased from Rs 2.75-lakh crore in March 2015 to Rs 7.33-lakh crore as on June 2017. “Under Indradhanush roadmap introduced in 2015, the Government had announced to infuse Rs 70,000 crore in State-run banks for over four years to meet their capital requirement in line with global risk norms, known as Basel-III,” he said.
In line with the plan, PSBs were given Rs 25,000 crore in 2015-16, and similar amounts have been earmarked for following years. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19.
However, the Finance Ministry has been making an all-out effort to push the growth of micro, small and medium enterprises (MSMEs) through enhanced access to financing and markets, and a drive to finance MSMEs in 50 clusters. “While individual ministries will spearhead and provide momentum, banks will undertake speedy processing of loan applications in a hassle-free manner. Fintech companies will be roped in to cut down the appraisal process and generate quality loan applications,” it said.