In what could be a major boost to the economy, the government announced a recapitalisation plan for PSU banks which could help them negate the problems of bad loans. A total of Rs.2.11 trillion would be available under this plan.
Of the Rs.2.11 lakh crore, Rs.1.35 lakh crore will be in the form of recapitalisation bonds. Rs.58,000 crore is expected to be raised by selling shares, with the budget providing a provision for Rs.18,000 crore. The current provision enables the government to reduce its stake in state-owned banks to as low as 52 per cent.
This financial boost will help banks which are plagued with non-performing assets increase their lending capital, which in turn will enable genuine small-scale borrowers get loans for their businesses, thereby helping the economy in the long run.
The year 2017 has been tough for banks, with bad loans amounting to Rs.9.5 trillion ($145.56 billion).
The Rs.1.35 lakh crore recapitalisation bond plan will cost the government around Rs.9,000 crore in the form of interest, which the government hopes to offset through an improved economy.
The amount is expected to be pumped in over the next two years, with the government likely to implement new reforms in the banking sector following this.
The government had previously sanctioned a sum of Rs.70,000 crore to banks in the year 2015, with around Rs.56,000 crore already utilised.
Most Indian banks are also struggling to meet the capital requirement for BASEL III norms, which are expected to be implemented from March 2019. As per a report by Fitch Ratings, a total of $65 billion is needed by Indian banks to meet the norms, with the government budget currently having provision for just $3 billion.