Prime Minister, Manmohan Singh, said on Wednesday a planned $15-billion scheme to waive debt held by small farmers would clean up banks' balance sheets and be funded using tax and non-tax revenues.
The finance minister announced the 600-billion-rupee package in his budget speech last Friday but has given few details as to how the scheme will work.
"It is an income transfer on an unparalleled scale," Prime Minister Manmohan Singh told parliament.
"It will allow the fresh flow of institutional credit to farmers, it will clean up bankers' balance sheets, it will stimulate economic activity in rural areas and I don't make any apologies on this." He said the scheme would be finalised by June.
"Banks will be compensated as and when the loans become due. The details are being worked out," Singh said.
In the budget, Finance Minister Palaniappan Chidambaram said the debt relief package applied to all farm loans made by state-run commercial, regional rural and co-operative banks up to March 31, 2007 and overdue on Dec 31.
Farmers with up to two hectares of land would be eligible for a complete write-off of loans overdue on Dec 31, 2007, and which remained unpaid up to Feb 29.
Singh said dues to the banks relating to loans for crop production and investment in equipment would materialise over three to four years.
"We will make adequate provisions from tax and non-tax revenues over this period to fund this package. Let there be no doubt that the banking system will not be constrained in any manner and there will be no contraction in liquidity," he said.
Shares in state-run banks State Bank of India, Bank of Baroda, Bank of India and Union Bank of India remained weak after the prime minister's comments.
State Bank of India was 1.9 per cent down on the day, Bank of Baroda shares were 5.5 per cent off and Union Bank shares were down 6 per cent.
India's main share index, in which only the State Bank of India features, was up 0.3 per cent.