FM Jaitley announces bank recapitalization plan, amidst data showing Indian Economy’s position

Finance Minister Arun Jaitley who in recent days has been under media scrutiny after the recent drop in GDP growth rates, today decided to create quite a bit of a flutter. It was reported that at 4 PM on Tuesday, Arun Jaitley would be making a major announcement and as a result speculations became rife.

A few citizens felt that Income Tax rate would be on the cards and a few others felt that GST would be the main point of agenda. Reports on the other hand speculated that the announcement would be pertaining to the banking sector and would focus on the recapitalisation plans of banks.

Twitter users too were gripped by this speculation:

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After about a 30 minute delay, Jaitley finally started his conference to end the whole suspense. He stated that the government would be appropriately responding to any challenges faced by the economy. He affirmed that they want to ensure that India remains a high growth economy and after analysing the whole scenario, the government was convinced that macro-economic fundamentals are strong.

Hence a presentation was created to chart out ways by which the economy can be developed further.

The presentation began by showcasing how inflation and current account deficit have both shrunk and the Forex reserves have crossed beyond $400 billion. The presentation then put out charts which claimed that the GDP in the long term would be shrugging off the recent dip. The government continued its presentation by putting out the “transformational reforms” it has taken like, GST, disinvestment program, increased public spending when it comes to road, railway, electricity etc sectors.

They finally came to the point and put forth the major announcements what the cabinet decided today. These bold steps mainly pertained to public sector banks:

  • An Public sector banks capitalisation plan of Rs 2 lakh 11 thousand crores.
  • The above will be achieved through Recapitalisation bonds of Rs 1,35,000 and budgetary support of about Rs 76,000. Recapitalisation is basically the process to restructure the debt and equity of a company. The nature and details of the bonds would be determined by the government and the details would be made clear later.
  • Trade receivable enhanced discounting system (TReDS) for micro, small and medium enterprises (MSME). TReDS allows discounting of bills by MSMEs and allows a seller to get credit against a bill which is due to him at a later date. The discount is the interest paid to the financier.
  • Industry specific custom-made MUDRA schemes were also announced, details of which will be worked out.

Jaitley in a concluding statement stressed that efforts have been made to increase public spending. He also talked about how the non-performing assets (NPA) of banks were not clear in the past and only via the asset quality review, capital infusion, provisioning norms, the true financial health of the public sector banks were revealed. Thus a bold step like that capitalisation plan was undertaken and in the coming days a series of banking reforms too would also be announced.

As affirmed by the government, this presentation was a response to the current situation of the economy and it remains to be seen how effective these steps are when it comes to the final economic results and numbers.

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