Jaitley, however, said government stands firmly behind state-run banks and will find resources to fund any additional capital requirement.
Nifty PSU Bank index gained over 3 per cent after falling as much as 2.81 per cent. The gains were led by IDBI Bank, SBI, Andhra Bank and IOB.
SBI stock added as much as 6.89 per cent on the National Stock Exchange (NSE), while IDBI Bank jumped over 10 per cent after Jaitley said the process of transformation of IDBI Bank has already started and government will take it forward reducing its stake in the public lender below 50 per cent.
"Allocation of 25,000 for recapitalization of banks is only a patch with the total requirement identified at 1,80,000 crore by the Economic Survey," said Milind Kothari, Managing Partner & Head - Direct Tax, BDO India.
"This area needs serious attention as the banks play a vital role in spurring private investment that is so vital for an all-round economic revival," added Kothari.
Banking sector is grappling with rising non-performing assets (NPAs), which are expected to rise further in the coming quarters.
Gross NPAs of public sector banks was Rs 3.60 lakh crore at December end, up from Rs 2.67 lakh crore at the end of March 2015.
In the third quarter alone, many leading public sector banks, including Bank of Baroda, Bank of India and IDBI Bank, reported their highest ever quarterly losses aggregating to over Rs 12,000 crore, while others like SBI and PNB witnessed sharp erosion in profits.
Last year, the government had announced a revamp plan 'Indradhanush' to infuse Rs 70,000 crore in state-owned banks over four years, while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirements in line with global banking risk norms Basel III.