New Delhi: A day after announcing major capital infusion for public sector banks, Finance Minister Arun Jaitley said this will substantially improve the situation.
"I think this will substantially improve the situation. In the management of the economy of the country, there is no easy day and our own experience of the last three-and-a-half years has been that we have been continuously taking up challenges, one after the other, taking various steps, reform measures which respond to the situation and many of them worked well," Jaitley told ET Now in an interview.
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 nearly Rs 7 lakh crore over five years.
Of the support to banks, Rs 1.35 lakh crore will be raised through recapitalisation bonds and the remaining sum through budgetary support and market borrowings.
The finance minister said: "Our whole programme for giving an impetus to infrastructure creation for encouraging FDI (foreign direct investment), for bringing transparency in economic and commercial decisions, have been rewarded very well. But then there are problems and one of the key problems was what happens to the banks and the manner in which the banking system was being run during the two UPA governments, particularly during the second UPA government, leaves a lot to be desired."
Talking about bank lending Jaitley said during the boom period and somewhat thereafter, there was indiscriminate lending as though there is no tomorrow. And the "risk mitigation factors" were not really factored in.
"I regret to say that the central bank also looked the other way. And then by just restructuring loans, you were evergreening the problem. And all this was being allowed. It is only in March 2015 that people woke up to the problem that you have lent so much, you cannot really sweep the problem under the carpet.
"The banks came out with the truth as to the real number of stressed assets and then of course the central bank came out, somewhat with very strict provisioning norms and corrective action with regard to the banking system started. And that is the legacy of the NPA (non performing asset) problem," he added.
The finance minister said the government's decision of demonetising high value notes last year November has brought in a lot of CASA deposits to the banks.
"Their current accounts, savings accounts are full of money. But in order to lend that money, the banks must have capital adequacy. How do you get the capital? Do you give it straight from the budget? Do you get the Reserve Bank to part with some of its reserves or do you ask the banks to raise money from the market or do you resort to the recapitalisation bonds which in turn will add to the government debt and that debt has to be serviced?
"In the last few months, we have been working on it. Finally, we came out with our response to the situation where a large capital of Rs 2.11 lakh crore is being given to the banks," he added.
The minister added that this recapitalisation has to be accompanied by a series of banking reforms "which we will finalise".
"I am sure once the money gets inducted into the banks, their ability to lend will substantially improve and it is our priority that the SMEs should get the priority because large businesses can resort to global funding."