The Central government seeks to directly issue Rs 1.35 lakh crore of bank recapitalisation bonds in an attempt to acquire the entire liability of repayment and interest in the Union budget.
Through this move, the government will be able to keep state-run banks from building a pile of bad debt and make funds available to more productive sectors of the economy.
A senior official was quoted by Economic Times as saying that the Centre is likely to seek approval on the funding mechanism from Parliament in the upcoming winter session, which will be held from December 15, 2017, to January 5, 2018.
"We will try to get the approval from Parliament in December itself, allowing the first tranche of the bonds to be issued before the end of the calendar year," the official said, adding that the bonds will be front-loaded.
Earlier reports also suggested that the Finance Ministry might infuse about Rs 70,000 crore through recapitalisation bonds in Non-Performing Asset (NPA)-hit public sector banks over the next four months.
Finance Minister Arun Jaitley, in October, announced the Rs 2.11 lakh crore bank recapitalisation plan for state-owned lenders that are weighed down by bad loans in a bid to stimulate the flow of credit to spur private investment.
The Centre said the bulk of the capital – Rs 1.35 lakh crore – would come through the issuance of recapitalisation bonds. The remaining Rs 76,000 crore would come through budgetary support over two fiscal years.
Such measures being taken by the Centre come as a relief for commercial banks struggling to provide for the surging stressed assets in the system. Bad loans in the Indian banking system surpassed Rs 8 lakh crore as of June 30.
This pushed banks to squeeze their lending capacity and the low capacity utilisation at the factories kept private-sector investment stagnant.
Therefore, in order to ensure that the investment pipeline in India works again, it was necessary for the government to restore state-owned banks to health.
"Everything is linked to the reforms which each board will consider within a short time as to what kind of business and how they want to go ahead. It's not easy money which is going to come: That is the main point. It has to be followed with a whole lot of reforms," said Financial Services Secretary Rajiv Kumar.