India to Add $2.3 Billion to State Banks for Bad Loans

State Bank of India and Central Bank of India (CBOI) are among 20 government-run banks that will receive a 140 billion-rupee ($2.3 billion) capital infusion to guard against soured loans in a slowing economy.

The recapitalization of state-controlled banks will enable them to raise money through share sales, Rajiv Takru, the Finance Ministry’s banking secretary, told reporters in New Delhi yesterday. State Bank will get 20 billion rupees, he said. The government, which had set aside funds for the infusion in the budget proposed in February, delayed the plans in July amid a slump in shares as borrowing costs surged.

The injection is part of a ministry goal to help banks boost credit and meet tighter capital-reserve requirements. Bad debt as a percentage of Indian bank lending rose to a six-year high in June, with government-run banks holding a higher share of non-performing loans, central bank data show.

“The infusion will help as the pain in terms of profitability and bad loans is going to last for another couple of quarters,” Jisha Nair, a Mumbai-based banking analyst at BOB Capital Markets Ltd., said by phone yesterday. “The banks will be better positioned to tap equity markets for additional funds now.”

The government usually infuses capital into lenders by buying their shares. Rules requiring government stakes of at least 51 percent have curtailed state banks’ ability to sell shares, making them undercapitalized relative to privately owned lenders.

Economic Slowdown

Capital adequacy ratios at the state-run banks based on so-called Basel II rules stood at an average 12.4 percent as of March 31, lower than the 13.8 percent average for all the country’s lenders, Reserve Bank of India (BOI) data show. While financial institutions started reporting ratios under the more stringent Basel III requirements in June, the RBI is yet to publish an industry average based on the new standard.

China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults. China has eased rules for writing off debt to small businesses since 2010 and policy makers are pushing the lenders to increase risk buffers following an unprecedented credit boom that began in 2009.

IDBI Bank

IDBI Bank Ltd. (IDBI) and Central Bank of India will get 18 billion rupees each, while Indian Overseas Bank (IOB) will get an investment of 12 billion rupees from the government, an e-mailed statement from the Finance Ministry showed. Bank of India will get 10 billion rupees, while Bank of Maharashtra (BOMH) will receive 8 billion rupees.

State Bank of India may raise additional capital of 17 billion rupees by selling shares to large investors, Takru, the banking secretary, said. The bank’s board may approve the share sale plans on Oct. 30, he said.

India’s economy, Asia’s third largest, will expand 5 percent to 5.5 percent in the fiscal year ending March, the Finance Ministry said in its quarterly review released on Oct. 8. Goldman Sachs Group Inc. predicted on Sept. 3 growth of 4 percent, which would be the weakest pace in more than 10 years.

Bad loans at Indian lenders climbed to 3.9 percent of total lending as of June 30 from 2.4 percent in March 2011, according to an Aug. 22 report from the RBI. State-run banks account for three quarters of the country’s lending.

The S&P BSE Bankex Index rose 0.6 percent yesterday. State Bank of India (SBIN), the nation’s largest, gained 2.5 percent to 1,716.55 rupees. Central Bank climbed 1.3 percent and IDBI Bank jumped 4.2 percent.

To contact the reporters on this story: Anto Antony in Mumbai at aantony1@bloomberg.net; Siddhartha Singh in New Delhi at ssingh283@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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