Govt has a 2-lakh-crore bank capitalisation plan to spur economy

Finance Minister Arun Jaitley said the Indian economy is on a strong wicket, with growth having bottomed out and a rebound expected in the coming quarters based on the back of “strong macroeconomic fundamentals”.

Written by Aanchal Magazine | New Delhi | Updated: October 25, 2017 7:25 am
Arun Jaitley, Recapitalisation, arun jaitley press conference, economy, BJP, capitalisation plan, indian economy, Subhash Chandra Garg, rajiv kumar, india GDP, indian growth Union Minister for Finance and Corporate Affairs, Arun Jaitley addresses a Press Conference in National Media Centre in New Delhi on Tuesday. (Source: PTI Photo)

To boost public expenditure and push economic growth, the government Tuesday announced enhanced spending for construction of roads and highways, a capitalisation plan for banks worth Rs 2.11 lakh crore over two years and prioritised financing support for MSMEs in 50 clusters.

Finance Minister Arun Jaitley said the Indian economy is on a strong wicket, with growth having bottomed out and a rebound expected in the coming quarters based on the back of “strong macroeconomic fundamentals”.

He said there is need to increase public spending and, therefore, an effort has been made to increase public spending to an “unprecedented level’’.

“In the last few weeks, a lot of discussions took place within the government in relation to the economy. Finance Ministry (officials) had detailed meetings with Prime Minister… for last three years, India has been the fastest growing major economy in the world and our intention is that the high-growth economy that India has become, we continue to maintain that position,” Jaitley said.

The assessment on the economy presented by the entire Finance Ministry team, which included presentations by Finance Secretary Ashok Lavasa, Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar, comes exactly three weeks after Prime Minister Narendra Modi gave a detailed presentation on the state of the economy.

Of the Rs 2.11 lakh crore earmarked for capitalisation of banks, Rs 1.35 lakh crore will be through recapitalisation bonds, while the remaining Rs 76,000 crore will be raised by banks from the market and provided by the government through budgetary support, Rajiv Kumar said.

The recapitalisation bonds will be frontloaded, that is, over the next four quarters, and a maximum timeframe of two years, Kumar said. Depending on the nature of recapitalisation bonds, their issuance can impact the government’s fiscal deficit target.

“The nature of those bonds will be determined by the government and we will then make it public as to in what manner and how those bonds are being issued. The bonds necessarily need not involve cash outflow, but they are a part of the debt of the issuing agency,” Jaitley said, adding that the bonds are for strengthening the banks and will be in the larger interest of the economy.

Asked if the issuance of these bonds will impact the government’s fiscal deficit target, Jaitley said it will depend on the nature of the bonds and the manner in which they are dealt with. Citing global examples, Chief Economic Adviser Arvind Subramanian said, “The recapitalisation bonds count towards debt. It will depend on which agency is issuing it, government or someone else. Under IMF accounting practice, such recapitalisation is treated below the line, meaning it’s not part of deficit, but under our own accounting practice, it is above the line and part of the deficit. So, that is the distinction. The reason that it is below the line is because when you recapitalise, you do not directly add to the demand for goods and services, which is what the deficit measures.”

Jaitley also said capital infusion would be accompanied by a series of banking reforms which would be spelt out in the next few months. Non-performing assets of banks have increased from Rs 2.75 lakh crore in March 2015 to Rs 7.33 lakh crore as on June 2017. He said banks would get Rs 18,000 crore under the Indradhanush plan over the next two years.

Under the Indradhanush roadmap introduced in 2015, the government had announced to infuse Rs 70,000 crore in state-run banks over four years to meet their capital requirement in line with global risk norms, known as Basel-III.

In line with the plan, public sector banks were given Rs 25,000 crore in 2015-16, and a similar amount has been earmarked for the following years. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19. The annual interest on these recapitalisation bonds and the principal on redemption are likely to be paid by the central government, while the funds so raised are to be used to capitalise the state-run lenders.

With banks initiating insolvency resolution process against large defaulters, their capital requirements are set to rise as they will need to account for loan losses. Adequate capital, especially in the wake of banks pursuing bad loan resolution plans to pare stressed assets, is essential to ensure that lenders are able to support growth. Gross Domestic Product (GDP) growth has fallen to 5.7 per cent in April-June — the lowest in at least five quarters.

Rajnish Kumar, Chairman, SBI, said: “This milestone announcement on recapitalising banks in one-go is a bold and courageous move and was indeed the need of the hour. It will generate balance in overall demand and supply by bringing more investments in sectors like infrastructure. These funds will also help in efficiently managing risk and credit capital related requirements of the banks. The steps will also encourage private participation, thus boosting growth going forward. The thrust to infrastructure will generate direct and indirect positive cascading effects for a lot of related sectors and will create feel-good factor for all stakeholders.”

Chandrajit Banerjee, Director General, CII, said: “The government has imparted a huge boost to bank recapitalisation… which is likely to kickstart the credit cycle and facilitate private investments… A three-pronged strategy to encourage investments is evident in the announcement of expanding public expenditure on infrastructure, boosting private investments and addressing delayed payments to the MSME sector.”

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