India set its target for capital infusion into state-run banks at 140 billion rupees ($2.6 billion) for the next fiscal year to help lenders comply with tighter rules and boost credit growth.
“Our banks will always meet the Basel III norms, which are coming in a phased manner,” Finance Minister Palaniappan Chidambaram said today in New Delhi, while presenting the federal budget for the year ending March 2014 to the parliament. He didn’t specify how the money will be invested.
Increasing the risk buffers would allow state-run lenders, which account for three-fourths of lending, to boost credit and revive an economy that’s set to expand at the slowest pace in a decade. India’s banks will need to raise as much as 1.75 trillion rupees from equity sales to meet the Basel III capital rules, according to estimates from the central bank.
State-run banks will need as much as 910 billion rupees in equity capital from their biggest shareholder to comply with the rules over the next five years if the government wants to maintain its current stakes in the lenders, Reserve Bank of India Governor Duvvuri Subbarao said in a speech on Sept. 4. The banks will also need to sell 590 billion rupees of shares to other investors, he estimated.
The extra capital is required to ensure that the banks can continue to meet the regulatory requirements, while bolstering credit growth, Subbarao said at that time. Bank credit is currently at about 55 percent of gross domestic product, and needs to be higher to boost economic expansion, he said.
The S&P BSE Bankex index, which tracks 14 Indian lenders, fell 3.6 percent, the most in a year. State Bank of India, the nation’s largest lender by assets, fell 6 percent to 2,080.90 rupees at the close in Mumbai.
“Those who held on to the stocks in expectation of aggressive announcements in the budget to revive capital markets and the economy, sold,” said Hatim Broachwala, a Mumbai-based banking analyst at Karvy Stock Broking Ltd.
India’s central bank on Dec. 28 said it would postpone starting the implementation of new capital rules under the Basel III agreement until April 1, from an original deadline of Jan. 1, following delays by the U.S. and European Union regulators in issuing the final standards for their markets.
In India, the rules would require banks to have minimum Tier 1 equity capital at 5.5 percent of risk-weighted assets by March 2015, up from the current 4.5 percent, the RBI said in May. The minimum Tier 1, or core, capital will be raised by 100 basis points to 7 percent, according to the rules.
State-run lenders may be required by the government to meet tighter requirements. They currently face a Tier 1 capital-ratio target of 8 percent, and must have a minimum total capital- adequacy ratio of 12 percent.
The government last year proposed investing 158.9 billion rupees in state-run lenders for the year ending in March. Prime Minister Manmohan Singh’s administration has given its approval to infuse 125 billion rupees into 10 banks by March 31, Chidambaram told reporters on Jan. 10, without naming the banks.
State Bank’s board on Jan. 19 approved a preferential allotment of shares to the government for raising 30 billion rupees of capital. The Mumbai-based bank’s Tier 1 capital ratio was at 8.66 percent as of Dec. 31, and its capital-adequacy ratio was 12.21 percent. The government had invested 79 billion rupees in the lender by buying preferential stock in March after its Tier 1 capital fell below the target.
Punjab National Bank (PNB), the country’s second-largest government-controlled lender, also received approval from its board on Jan. 17 to raise 12.5 billion rupees by a preferential allotment, exchange filings show. The lender’s Tier 1 ratio was 8.62 percent by the end of 2012.
India, which faces the highest fiscal deficit among the major emerging economies, can reduce the burden it faces to recapitalize the banks by letting its shareholding in the lenders fall to 51 percent, from about 70 percent, Subbarao said last year. That would reduce its equity infusion to less than 700 billion rupees, he said.
India’s economy is set to expand as much as 6.7 percent in the year ending March 2014, the government said in the Economic Survey published yesterday. The country’s gross domestic product will rise 5 percent in the 12 months through March 2013, the least in a decade, a government forecast showed on Feb. 7.
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