India to Boost State-Run Banks’ Capital Through Share Sales

India will allow the nation’s state-run banks to sell shares in public offerings to boost their risk buffers and comply with tighter capital rules.

Lenders will require an infusion of 2.4 trillion rupees ($40 billion) in equity by 2018 to comply with international standards laid out by the so-called Basel III regulatory regime, Finance Minister Arun Jaitley said today in New Delhi as he presented the federal budget for the year ending March 2015 to parliament.

“The capital of the banks will be raised by increasing the share holding of the public in a phased manner through the sale of shares, largely to retail common citizens of the country,” Jaitley said. The government’s majority ownership in the lenders would be preserved, he said.

The government’s decision to sell stock to improve state-run banks’ capital ratios comes as bad loans in the slowing South Asian economy drags down profitability. India’s economy grew 4.7 percent in the year through March, after a decade-low expansion of 4.5 percent in the previous 12 months.

The CNX PSU Bank Index, which tracks 12 state-controlled lenders, lost 1.2 percent as of 3:20 p.m. in Mumbai after rising as much as 3.6 percent earlier today. State Bank of India, the nation’s largest lender by assets, fell 1.7 percent to 2,539 rupees. The benchmark S&P BSE Sensex sank 0.5 percent.

Infrastructure Lending

Funds raised by banks for infrastructure loans will be exempted from reserve demands like the Cash Reserve Ratio, Statutory Liquidity Ratio and priority sector lending, Jaitley told parliament, without providing additional details.

The proposed budget, which lawmakers need to pass by July 31, has plans to revive special economic zones, while building more highways, coal-fired power plants, airports and ports. Jaitley also proposed to extend tax holiday for power producers that begin generation by March 31, 2017.

“The budget had several steps for faster implementation of power and infrastructure projects, which will help the banks to improve asset quality,” Vishal Narnolia, Mumbai-based banking analyst SMC Global Securities Ltd. said by phone today.

The infrastructure industry was among five that contributed “significantly” to sour debt at Indian lenders, the central bank said in its financial stability report last month.

Bank Permits

India’s 26 state-run banks accounted for 76 percent of loans outstanding in the country as of March 2013, RBI data show. The country’s 20 private lenders, led by ICICI Bank Ltd., held more than 19 percent of bank credit, while 43 foreign banks accounted for the rest, the data show.

The government will consider suggestions for the “consolidation” of state-run banks and the Reserve Bank of India will put in place a framework for the “continuous authorization” of new bank permits, Jaitley told lawmakers.

IDFC Ltd., India’s largest lender to road projects, and Bandhan Financial Services Pvt. won preliminary approvals from the central bank in April for what would be the first permits to set up bank networks in more than a decade.

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