Union Finance Minister Arun Jaitley and Chief Economic Adviser (CEA) to the government of India Arvind Subramanian unveiled an ambitious Rs 2.11 lakh crore bank recapitalisation plan for public sector banks (PSBs) reeling under the problem of bad loans. Out of the stated amount, Rs 1.35 lakh crore will come from the sale of recapitalisation bonds that the government will soon issue, and the rest Rs 76,000 crore from budgetary allocation and markets.

The government had budgeted Rs 70,000 crore for recapitalisation until 2019. So far it has disbursed Rs 52,000 crore. That leaves its commitment to only Rs 18,000 crore to be infused in the next two years. In fact, the banks were expected to raise Rs 1.1 lakh crore from the markets under the Indradhanush plan but they could raise only Rs 21,000 crore so far. According to the new plan, banks will now have to raise an additional Rs 58,000 crore from markets.

The only new element thus is the announcement of “recapitalisation bonds” amounting to Rs 1.35 lakh crore which is a significant infusion.

How will it work?

The government hasn’t spelled out the details yet but put simply, it or one of its agencies will issue these bonds, which the banks can subscribe to and raise funds. Thanks to demonetisation, the banks are already flush with liquidity since deposits that came post 8 November have mostly stayed with banks. Hence, raising funds through “recapitalisation bonds” shouldn’t be an uphill task. Doing this would have two benefits, it will bring down the excess liquidity in the system and also help in recapitalising banks.

Here’s what the experts have to say about the government’s method to resolve lingering problem of bad loan.

Reserve Bank of India (RBI) Governor Urjit Patel

Patel commended the government on behalf of the RBI, and said that the proposed recapitalisation package for the banking sector combined several desirable features.