The state-run lenders surged in trade today after Finance Minister Nirmala Sitharaman on Friday announced that the government will provide Rs 70,000 crore of recapitalisation funds to public sector banks upfront, instead of spreading it throughout the year. The gauge of government-owned banking shares – Nifty PSU Bank Index – surged as much as 6.5 per cent to touch an intraday high of 2,557.95 led by gains in Indian Bank, Central Bank of India, Allahabad Bank and Bank of India.

The move to frontload capital injections for state-run banks will help spur fresh loans, the Finance Minister said, adding that banks will also pass on all rate cuts to borrowers.

The move is significant as credit growth is key to the government's aim to make India a $5 trillion economy by 2024-25. Bankers have said that credit needs to grow 18-20 per cent annually to achieve the target.

In another policy measure, Ms Sitharaman said that banks would now pass on rate cuts through MCLR reduction to benefit all borrowers.

The two measures together would reduce EMIs for housing loans, vehicle and other retail loans directly linking repo rate to interest rates.

Meanwhile, the ratings agency Moody's said that the government's announcement of an upfront capital infusion of Rs. 70,000 crore in public sector banks will enable them to grow loans by around 13-15 per cent in the fiscal year ending March 2020 and will also allow them to meet the final Basel III capital requirements, news agency IANS reported.

Shares in State Bank of India, the country's largest lender, was trading at Rs 277.05 up 2.19 per cent on the NSE. It had hit a day high of Rs 288.

Punjab National Bank shares also jumped as much as 6.9 per cent. The stock touched an intraday high of Rs 68. In afternoon trade, PNB shares were trading higher 2.75 per cent at Rs 65.35.

All the twelve banks on the index were trading in green in the afternoon trade. The top gainer on the index was Indian Bank which was trading 7.87 per cent higher at Rs 179.60 at 1:20 pm.

The Nifty PSU Bank index was up by 2.8 per cent at 2,469.85 points in noon deals, outperforming the Nifty which was up nearly 2 per cent.