The move is set to push credit growth, which has been around 12 per cent, and boost consumer sentiment. Finance Minister Nirmala Sitharaman on Friday announced the decision as part of measures to boost overall economy which has been slowing down quarter after quarter.
The announcement of Rs 70,000 crore recapitalisation of the PSBs was announced in full Budget in July this year.
The move is significant as credit growth is key to the government's aim to make India a $5 trillion economy by 2024-25. Bankers have said that credit needs to grow 18-20 per cent annually to achieve the target.
In another policy measure, Sitharaman said that banks would now pass on rate cuts through MCLR reduction to benefit all borrowers.
The two measures together would reduce EMIs for housing loans, vehicle and other retail loans directly linking repo rate to interest rates.
"Working capital loans for industry will also become cheaper," Sitharaman said.
The government has also directed public sector banks to mandatorily return loan documents within 15 days of loan closure. This will benefit borrowers, who have mortgaged assets as it will help them raise further loan funds.
Among other measures to provide liquidity in the market and more money in the hands of people to spend, the government has also decided to give more credit support to NBFCs and MSMEs.
Additional credit support of Rs 20,000 crore will be given to HFCs by the National Housing Board (NHB), increasing it to Rs 30,000 crore.
"Partial credit guarantee scheme for purchase of pooled assets of NBFCs/HFCs upto Rs 1 lakh crore would be monitored at the highest level in each bank," Sitharaman said.
Further, in order to take advantage of liquidity with PSBs and last mile customer connect of NBFCs, PSBs would fast track collaboration for loans to MSMEs, small traders, self-help groups, and MFI client borrowers in co-origination mode with NBFCs.
In another effort to inject more cash into the system, the Expenditure Department will clear all the pending dues of the CPSEs and other departments.
Expenditure Secretary G.C. Murmu said soon the department will clear Rs 60,000 crore dues of the CPSEs and departments.
( With inputs from IANS )