Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

When bankers have dug themselves into a hole, there's nothing like a bit of distraction. It helps to pass the hours, but has much to recommend it even otherwise.

Wells Fargo's John Stumpf can take his time looking for a diversion -- his troubles are still too fresh. But the assets of India's state-run lenders have been so bad for so long that the moment of crisis has passed. Even expensive amusement is starting to make sense.

State Bank of India, the biggest of them all, is setting the tempo. This week, Arundhati Bhattacharya, the bank's chair, laid the foundation stone for a new office in an international financial center being built in Prime Minister Narendra Modi's home state of Gujarat.

Gujarat International Finance Tec-City, or Gift City, has been panned by skeptics as a Modi vanity project, and for SBI to invest in what will probably remain a ghost town shows just how desperate banks are to take their minds off the daily grind.

Who can blame them? Trying to get their money back from customers like Vijay Mallya, the liquor-to-airline tycoon who left the country with $1 billion of unpaid debt, isn't easy. Even more difficult is begging for $18 billion in capital to fill the void created by soured loans.

That's the amount Moody's expects 11 Indian state-controlled lenders will need to raise externally over the next three years.

Those calculations are based on some fairly generous assumptions, such as SBI garnering a return of 0.7 percent on its assets. That hasn't happened in a long time:

Tall Order
State Bank of India's need for external capital could be larger than estimated if profitability disappoints
Source: Bloomberg, Moody's

One way to revive profitability, and reduce the need for external capital, is for bank CEOs to pray their credit costs go down. The good news is that the local steel industry, a major source of bad loans, has been propped up by the government's anti-dumping campaign.

Steelmakers are boosting output in defiance of the global glut. Still, with the central bank forcing lenders to stop hiding bad debt and instead start providing for it, it's not clear that the capital deficit will be bridged by profit. During the financial year ended March 31, credit costs accounted for more than 100 percent of the pre-provision income for eight of the 11 state-run banks that Moody's tracks.

Valuations Are Still in the Dumps
The worst may be over for India's banks, but that doesn't mean investors have their check books open
Source: Bloomberg
*Market-cap weighted average of 21 lenders.

That leaves only one solution on the table: stop lending. Since each new loan needs additional capital, slowing annual credit growth from Moody's base case of 13 percent to 8 percent could reduce the begging-bowl shortfall by half. However, that would annoy the government, which wants a booming economy ahead of the 2019 general elections. As Moody's euphemistically puts it, slower loan growth will be "as much a government policy decision, as it is [the banks'] own decision, due to its potentially significant macroeconomic implications."

Here's an idea: What if bankers could be away on ribbon-cutting ceremonies whenever a livid official calls to find out why corporate advances aren't picking up? Distraction has its uses.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at