Jaitley says priority is strengthening banks’ capacity to lend

The imperative need now is to complete the task of strengthening the banks through capitalisation to enable them to lend to the MSME sector and trade that is now moving into the formal economy, union minister of finance and corporate affairs Arun Jaitley said on Thursday.

The lending capacity of the bank has hitherto been constrained due to capital inadequacy and the task before the government is to fix the banks so that they were no longer averse to lending to small borrowers, he said. 

Speaking at the 90th annual general meeting of the Federation of Indian Chambers of Commerce and Industry (FICCI) in New Delhi, the finance minister said it was also important to keep the momentum of development of urban and rural infrastructure going.

Infrastructure development was at the core of India's growth story, he said, adding that while highways, ports and aviation were growing well, the railways need to speed up its infrastructure development schemes -- from railway stations to quality trains and the number of superfast trains.

With regard to the development in rural areas, Jaitley said the main focus of expenditure in the next few years would be on housing and sanitation.

Responding to the suggestions of Pankaj Patel, president of FICCI, the finance minister said that after the unified GST is implemented it would take some time to rationalise taxes. It was important to continue with structural reforms for greater formalisation of the economy, he said, adding that it was only when the tax base is widened in a formalised economy is rationalisation of direct and indirect taxes possible.

Patel, in his welcome remarks, pointed out that globally, nations were moving towards a low-tax regime with a focus on the internal economy and a territorial taxation regime. It was time to re-think whether India should adopt this course or look for a new model of taxation that supports exports and growth, he said.

The finance minister's comments come weeks before the Union Budget will be presented on 1 February, the last full budget by the National Democratic Alliance government before general elections in 2019. On Wednesday, Prime Minister Narendra Modi also reiterated the government's commitment to pushing through more reforms.

''In 2017, India has seen more structural changes taking place than any time in the recent past. The changes in 1991 were more out of compulsion while the changes in 2017 more out of conviction,'' Jaitley said, adding that there may be some short-term adverse consequences of the structural reforms undertaken by the government.

India rolled out the goods and services tax (GST), brought in changes to the insolvency and bankruptcy code to make it more effective and initiated the process of capitalizing state-run banks over the past few months.

Highlighting the steps taken to resolve the issues in the banking sector, including the Rs2,11,000 crore capitalisation plan for state-run banks, Jaitley said it remains an important unfinished item on the government's agenda.

''Completing the unfinished task of strengthening state-run banks and resolving the bad debt problem is unquestionably one of the most important agendas on the table today. Lending capacity of banks is depleted because of NPAs (non-performing assets). Banks have a lot of liquidity on account of low-cost deposits but they are not able to lend because of capital adequacy issues,'' said Jaitley. Bad loans of state-run banks were more than Rs7 trillion at the end of the September quarter, as per government estimates.