Bailout not good but banks need to be strengthened: Jaitley

File Photo: Union Finance Minister Arun Jaitley

New Delhi, Jan 4 : Noting that the “bailout” for state-run banks through the Rs 2.12 lakh crore recapitalisation plan has turned out to be a “moral hazard” in view of the corporates’ inability to pay back loans, Finance Minister Arun Jaitley on Thursday said that capital infusion is solely aimed at strengthening the banking system.

He was replying to the debate on his Ministry’s supplementary demands for grants for 2017-18 in the Lok Sabha seeking Parliament approval for additional expenditure of Rs 80,000 crore towards recapitalisation of public sector banks (PSBs).

“Banks have given money to industrialists in the past… however, some are now sitting in London, others cannot pay back,” the Finance Minister said in an obvious reference to corporate accounts which account for a major portion of the bad loans accumulated by PSBs, including the case of absconding industrialist Vijay Mallaya, who has been declared a proclaimed offender by a Delhi court.

“This is the moral hazard with the bailout but we have to strengthen the banking system,” he said.

Jaitley also said that without bringing politics into the discussion on what he has earlier described as a “legacy issue”, the effort now is to improve the lending capacity of banks through infusion of adequate capital.

Referring to the Rs 2.12 lakh crore recapitalisation plan for state-run banks approved by the government in October, he said the objective is to ensure that the lenders’ ability to support growth is not impacted by their combined non-performing assets (NPAs) which have crossed the staggering level of Rs 7.5 lakh crore.

“In order to correct the situation, we brought in the Indradhanush plan to infuse Rs 70,000 crore spread over a period of three years, which is coming to an end.

“However, this money has proved inadequate owing to the provisioning amount going up on account of the Asset Quality Review (AQR) for banks ordered by the RBI, which brought out the real dimension of NPAs,” he said.

“So we need to put in more money and it becomes a bailout, which is not an ideal idea but it is important to keep the banks in good health,” he added.

Participating in a short-duration discussion in the Rajya Sabha on the state of the economy earlier on Thursday, Jaitley said that it was reckless lending by banks during the boom years in the previous UPA government that had led to accumulation of such huge NPAs, or bad loans, in the Indian banking system.

And this “reckless lending without proper risk management has affected the banks’ capacity to support growth” he said, adding that the massive lending by banks in the high-growth period after 2008 is now being reflected in their accumulated bad loans and through heavily leveraged corporate balance sheets.