The funds will be injected into 20 lenders majority-owned by the government, which together hold most of the country's record $150 billion in soured loans. Lenders with high stressed-asset ratios, such as IDBI Bank, will get a bigger portion of the money.
The government last October said it would inject a total of Rs 2.11 lakh crore ($33.1 billion) into its state-run lenders over two years. The Rs 88,140 crore announced on Wednesday will be injected by March, while the rest will be doled out over the next fiscal year.
State-run lenders account for more than two-thirds of the country's banking assets.
But the government on Wednesday said lenders must implement a series of reforms to get the funds, including improving their due diligence, allowing specialised monitoring for loans above Rs 250 crore, and limiting the number of lenders that can group together to dole out loans.
Analysts had said mandating reforms would be critical to prevent banks from engaging in the same indiscriminate lending that led to the current problems.
"All public sector banks will be adequately capitalised and enabled to serve people and support inclusive growth," Rajeev Kumar, India's top banking bureaucrat, told a news conference.
"Capitalisation is dependent on the compliance of reforms."
Of the funds to be injected by March, the government will raise Rs 80,000 crore by issuing recapitalisation bonds, which will not be tradeable in markets, and provide an additional Rs 8,140 crore from its Budget.
Total recapitalisation will cross Rs 1 lakh crore this year, including sales of shares to external investors, he added.
The capital allocation will boost state banks' ability to dole out credit by Rs 5 lakh crore, Mr Kumar said, while another official said the bonds will not add to the country's fiscal deficit as they will be accounted for under a separate system.
IDBI Bank, the lender with the highest stressed-loan ratio, will get the biggest chunk of the money at Rs 10,610 crore. Top lender State Bank of India will get Rs 8,800 crore, while second-biggest Punjab National Bank will get Rs 5,473 crore.
Analysts said that the injections were just one step in the long process to clean up the country's bad debt, and that the lenders' final capital position will also depend on how they undertake the central bank's directive to take nearly 40 large corporate loan defaulters to bankruptcy proceedings, which will likely involve haircuts on their loans.
Srikanth Vadlamani, vice president of the financial institutions group at Moody's Investors Service, also noted that the reforms banks must undertake to receive the funds may not be enough.
"While some of these changes are steps in the right direction, we do not judge them to be meaningful enough to address the structural corporate governance issues facing these banks," he said.
The reforms announced also include directing lenders to have a formal process to recover stressed loans and having a better risk framework. Mr Kumar, the bank bureaucrat, gave only an overview and did not provide much detail.
Indian Bank, a smaller but profitable state-run lender, was the only bank to have not been allocated any capital in the latest round.
($1 = 63.69)