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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  1. Anthony Mathias
    Oct 25, 2017 at 6:35 pm
    The point is why are NPA's growing . The answer it that the economy is slowing down and companies that had taken loans expecting robust economic growth as is being trumpeted are finding no demand and are in a fix. Providing additional capitalization does not solve any problem, as private sector do not want loans for additional capacity when they have excess capacity. Look at the steel sector the housing sector, the telecom sector the power sector the textile sector the mining sector there is no fresh plans for capacity expansion. All these sectors are the cause of the NPA's. Giving additional capital would only solve the problem of banks carrying on their operations when the NCLT auctions these NPA's which is going to have the banks take a huge hair cut. This is not going to boost the economy but will keep the banks from carrying on only. If the all the NPAs are written off the books then the question will be whether the banks will be solvent,
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      Ask
      Oct 25, 2017 at 4:33 pm
      It is time for India to look at the system British left us - does it reflect indian ethics and values? Does it work for the common man? British designed the system to drain india of its wealth see the infographic: : visualcapitalist /2000-years-economic-history-one-chart/?utm_source linkedIn utm_medium social utm_campaign SocialWarfare Rather than depending on foreign NGO's and special interest groups, time for india to design a system that works for the common man and reactive past glory.
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        Oct 25, 2017 at 4:20 pm
        There is risk of moral hazard here. If bank make money on the loans they give out then it is for them to keep as profits but if they lose money on the loans as a result of bad decisions then taxpayers are on the hook for that who by the way had nothing to do with bank's bad decisions. So by this government policy the prudent person is being penalized by forcefully taking money to give to banks who have made bad loan decisions. The right thing to do would be for banks to suffer consequences of their bad actions!!
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          Sujatha Selvam
          Oct 25, 2017 at 2:39 pm
          Certainly, this huge money, 2.11 lakh crore, is not going to benefit the common men. Only the top most beneficiaries are big corporate, who have already playing with government money, sorry people's money. This government is fooling us with big figures. The ultimate aim of this government is make the rich people more rich, and poor and middle class to utmost miseries.
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          1. Hanglur Srinivas Varna
            Oct 25, 2017 at 2:01 pm
            The banks can give loans to people like Vijay Malya and make lot of money. This is atrocious. What Jaitly is giving is not his money,it is the money of tax payers of India. This is the respect we have for tax payer. I have bitter experience with most of the banks when I go for making FD. There is no respect in banks for people who keep money, but there is great amount of respect for people who take money and run away like Lalit Modi, Vijay Malya and such people. Already our greedy share brokers jacked up the share prices of loss making public sector banks which were loss making till yesterday. Can the status of these banks over night?
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