India approves recapitalisation plan for state-owned banks

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FinMin Jaitley says, strong banks need of the hour

Seeking to boost India's economy, which was hard-hit by the note ban and Goods and Services Tax, Finance Minister Arun Jaitley Oct. 24 announced a massive Rs. 6.92 lakh crore package for infrastructure spending and another Rs. 2.11 lakh crore for bank recapitalization to revive investments and growth.

The government will infuse this sum over the next two years to "strengthen the lending capacity of banks to spur growth", finance minister Arun Jaitley told reporters.

According to CNBC-TV18, the government will make a crucial announcement related to the recapitalisation of capital starved public sector banks.

The main opposition party also termed as a "shoddy attempt" by finance minister Arun Jaitley to defend the "decimation" of the economy after he reeled out economic indicators to support the government's contention that GDP growth slowdown has bottomed out and economy is turning around. When results of the GDP of the first quarter came out then I had said that we will be ready for the response.

While speaking to the media Arun Jaitley also highlighted that the government took the cognizance of the rising criticism, and chaired a lot of discussions and reviews of the economy in the past few weeks within the ministry.

Besides bank recapitalisation, the Union Cabinet, at a meeting chaired by Prime Minister Narendra Modi, also approved the ambitious BharatMala Project that entails an expenditure of almost Rs 7 lakh crore to build 83,677 kms of roads over the next five years.

Macro-economic fundamentals are strong, he said, adding that there was a need to increase public spending.

Major rating agencies welcomed the move, as did the chairman of top lender State Bank of India, Rajnish Kumar, who called it "bold and courageous". But they also account for a bulk of the record 9.5 trillion rupees ($145 billion) of soured loans.

Accusing the government of waiving loans worth Rs 1,88,287 crore of wilful defaulters in the last three years, the Congress leader asked, "Is the government risking taxpayers' money for more such loan waivers without commitment to MSME and agrarian sectors?"

Finance ministry officials said the bank recapitalisation would be followed by a series of reforms in the sector.

The requirement has left some of the banks, which account for about 70 percent of India's outstanding loans, historically less capitalized than privately owned peers, obliging the government to support them.

The mountain of debt means that banks have been stretched too thin to lend for fresh investments, holding back economic growth.

Bank stocks rallied ahead of the news conference on expectations of a recapitalisation plan.

Bhanumurthy added that the move might have an impact on the government's fiscal deficit target this year.

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