India approves $32.4 billion state bank recapitalization plan

Finance Minister Arun Jaitley

Finance Minister Arun Jaitley

In a stimulus package aimed to boost flagging economic growth, create jobs and increase credit flow, the Union Cabinet on Tuesday approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks and massive road infrastructure investment of almost Rs 7 lakh crore over five years.

It is an increase of Rs 1.2 lakh crores over a year ago.

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.

The Centre on Tuesday unveiled a two year Rs 2.11 lakh crore recapitalisation programme for the PSU banks to allow them to start lending to push the economic growth and create jobs. Finance Secretary, Ashok Lavasa on this occasion said there are plans involving of developing border roads, that will "enhance national security".

"Going by past trend of oil bonds, fertiliser bonds and even bank recapitalisation in the 90s, this is likely to be a deficit neutral process as far as FY18 is concerned", said DK Pant, chief economist, India Ratings. The stressed balance sheets were on account of unrestricted priority sector lending over the previous decade that had eaten into banks' capital and profits. Finance Minister Arun Jaitley had expressed concern about the ailing banking sector in India, saying rebuilding capacity of banks is government's top agenda. Out of the approved amount, ₹1.35 lakh crores will be paid via bank recapitalisation bonds and the remaining ₹76,000 crores via budgetary support and market loans in the next couple of years. This is out of Rs 21.46 lakh crores. Depending on the nature of recapitalisation bonds, their issuance can impact the government's fiscal deficit target.

Real GDP growth average is 7.5% in the last 3 years. "These funds will also help in efficiently managing risk and credit capital related requirements of the banks", said State Bank of India Chairman Rajnish Kumar after the finance ministry announcement. Rs 92,150 cr GST collected The government has collected Rs 92,150 crore as Goods and Services Tax (GST) in September from 42.91 lakh businesses, the finance ministry said today.

The Confederation of Indian Industry (CII) welcomed the move, saying it will kick-start the credit cycle and facilitate private investments. The government will also use 180 billion rupees left from its previously budgeted recapitalisation fund. Lauding the GST, DEA Secretary further added that GST has been one of the biggest reform embraced by the country.

State owned banks have 70 per cent market share.

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

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