FM Arun Jaitley hints at bank recapitalisation to push growth

After India's gross domestic product (GDP) hit a three-year low of 5.7 percent the government is trying to implement a plethora of measures to stimulate economic growth.

Finance Minister Arun Jaitley on Wednesday promised that he would take all the necessary steps to boost the Indian economy. The government is mulling on measures to strengthen bank balance sheets by recapitalizing public sector undertaking (PSU) banks.

Arun Jaitley spoke to CNBC TV18 about the high-growth path he intends to implement, hinting at PSU banks recapitalisation as a plausible measure of higher economic growth.

Disclosing that he has held a series of meetings with different ministerial secretaries and economists, he said, "Some recent data raises certain concerns... and a lot of it has to do with the capacity of the banks, particularly PSBs, and therefore we are  in the process of discussion and very shortly whatever is required to be done in order to improve the environment in terms of policy, we'll certainly react to it."

When asked about the recapitalisation of banks, Jaitley said, "It's an obvious analysis that anybody dealing with the situation would make. Now, what steps will be taken, please wait for a decision on the matter."

The government had in the Budget outlined a provision of Rs 10,000 crore for recapitalisation of banks in FY18.

When Jaitley was urged to disclose a timeline for the measure to be implemented, he said that the government has been a "proactive" one and is going to react soon.

Sources in the Finance Ministry also said that lofty plans are underway to improve the plummeting Indian economy and planning is going to take some time.

The intellectual argument of recapitalising banks comes from Viral Acharya, the deputy governor of the Reserve Bank of India (RBI) as he had pointed out the economic crisis in various countries because of a lack of capital on the banks which directly affected their lending capacity, rendering them as dormant banks. Thus, he had suggested that India's growth is directly proportional to the adequate capitalisation of public sector banks.

The bank recapitalisation could be either done by filling the bank coffers with RBI reserves or by issuing recap bonds which are not the government of India bonds and do not add up to the fiscal deficit. The banks buy those bonds and the money made from it is put back into the public sector banks.

The rating agencies may raise objections to the particular method but Arun Jaitley could actively defend the decision by arguing that he has tried to fundamentally restructure PSBs in India.

The PSBs have also been asked to bring down government shareholding, in an attempt to privatise them which could also serve as a defence.

According to Antique Broking, the current speculated capital shortfall of PSBs in FY19 is close to Rs 1,24,000 crore with banks like IDBI, State Bank of India (SBI) and Punjab National bank is expected to contribute 60 percent of the total shortfall.

An assessment is also underway in the North Block which is trying to evaluate the fiscal headroom that the government is trying to create in order to deal with the falling Indian economy.