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India More Than Doubles Capital-Infusion Target for Banks

India more than doubled its target for a capital infusion into state-run banks to 158.9 billion rupees ($3.2 billion) for the year ending March 2013 as it sought to bolster risk buffers and boost credit growth.

The “government proposes to invest the money to strengthen the banks,” Finance Minister Pranab Mukherjee said today said in New Delhi while presenting the federal budget to parliament. “Forming a financial holding company to find funds for further investment in banks is also under consideration.”

Rising bad loans and a slowing economy have squeezed capital buffers at the state-run lenders, which account for three-fourths of the nation’s banking assets. The cash infusion may let banks meet tighter regulatory requirements and increase lending as the government takes steps to boost economic growth.

“A road map on further investment in the banks and a large amount of investment next year will give investors more confidence,” Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd., said in a telephone interview on March 14. “Banks with high capital ratios will be better placed to lend more when the economy improves.”

Funds will also be provided to the nation’s regional rural banks, Mukherjee said in his budget speech. India had 82 such lenders as of June, according to central bank data.

The Bankex Index, which includes 14 banking stocks, rose 1.3 percent after the government announced its investment plans. State Bank of India, the nation’s largest lender, rose 0.8 percent to 2,318.2 rupees in Mumbai.

Twelve state-run banks had a Tier 1 capital ratio of less than 8 percent, a target set by the government, as of December, excluding unaudited profits for the preceding nine months, ICRA Ltd., the local affiliate of Moody’s Investors Service, said in a note on March 1.

India had announced plans during last year’s budget presentation to invest 60 billion rupees in state-run lenders in the year to March. A finance ministry official said in November that the government decided to inject an additional 140 billion rupees to help boost capital and cover bad loans.

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