India Asks State Banks to Complete Plans for Capital Buffers

India’s state-run banks must decide this month on ways to raise more than 1.5 trillion rupees ($25 billion) by March 2018 to bolster risk buffers and meet Basel III capital standards.

“Banks have to look at options other than capital infusion by the government to meet the new Basel rules,” Rajiv Takru, banking secretary at India’s Finance Ministry, said in an interview yesterday in New Delhi.

The government will need to infuse as much as 910 billion rupees into its majority-owned banks to help them comply with Basel III requirements, and to maintain the state holding, Reserve Bank of India Governor Duvvuri Subbarao said in October. Bank lending in India grew 14 percent in the year to June 14, the slowest pace in at least three years, data compiled by the RBI show, as the cooling economy curtailed credit demand.

“Proactive measures by the government to raise capital ratios will boost the performance of banks,” Vishal Narnolia, a Mumbai-based banking analyst at SMC Global Securities Ltd., said by phone. “The fundraising plans will help lenders withstand asset-quality pressures, which will remain a concern until economic growth picks up.”

Economic Slowdown

India’s economy expanded 5 percent in the year ended March 31, the slowest pace since 2003, and less than the 10-year average of about 8 percent, government data show.

Bad loans at the country’s lenders reached 3.7 percent of total lending at the end of last year, the highest in at least five years, and eased to 3.4 percent at the end of March, according to data compiled by the RBI.

The central bank last month said the combined soured debt ratio for India’s banks may rise to 3.8 percent by September.

India plans to inject as much as 140 billion rupees into state-run banks including IDBI Bank Ltd., Dena Bank and Bank of Maharashtra by September to keep the so-called Tier 1 capital ratio above 8 percent, Takru, 57, said yesterday. State-run banks account for three-fourths of the nation’s lending.

“The government, as the largest shareholder, will step in to boost capital ratios whenever required,” he said.

The S&P BSE Bankex Index rose 0.4 percent at 11:59 a.m. in Mumbai. State Bank of India, the nation’s largest, gained 0.9 percent to 1,912 rupees.