Government should infuse capital to enable banks to lend more: Rajan

Bengaluru, June 22  The government should infuse capital in state-run banks to enable them to support credit growth, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Wednesday.

"Governments are sometimes reluctant to infuse bank capital because there are so many compelling needs for funds. Yet, there are few higher return activities than capitalising the public sector banks so that they can support credit growth," Rajan said at an interactive session with captains of industry and trade here.

Admitting that capital infusion into weak banks should accompany an improvement in (their) governance, Rajan said given the need for absorbing the losses associated with balance sheet clean-up, the government should infuse its capital quickly.

"If the government cannot buy bank equity directly with cash, it is for it to issue the banks Government Capitalisation Bonds, in exchange for equity. The banks would hold the bonds on their balance sheet. This would tie up part of their balance sheet, but would certainly be capital," Rajan said addressing about 300 members of the Assocham trade body on Resolving Stress in the Banking System.