The government of India has decided to infuse Rs.2.11 trillion in the national Public Sector Banks (PSBs) over a period of 2 years to strengthen their capital base. This came at a time when GDP growth rate of India had hit a record low of 5.7 % in the 2nd quarter of the current financial year, while the NPAs (Non-Performing Assets ) grew to 10 % of the loans advanced by the banks.

The ever-increasing NPAs have reduced the money lending capability of the banks. Banks have become apprehensive of lending loans to Corporate, translating into lesser investment in infrastructure and their cascading effect leading to a slower growth. Infusing such a massive amount will help the banks to write-off its bad loans, and subsequently, increase their lending capacity. A better lending capacity will increase the flow of capital in the economy, which is expected to kick the GDP growth rate. Recapitalization is also expected to curb the infamous twin balance sheet problem of India. According to Arvind Subramaniam, the Chief Economic Adviser to the government of India, given its fiscal position, recapitalization is the best the government could have done to revive the debt-laden banks of India.

Recapitalization is only the first step to address the rot in the banking sector. To put India back on the track of high growth the government must follow it with structural reforms and better monitoring should be done to ensure NPAs do not pile up.