India to Inject $3.65 Billion of Capital Into State-Run Lenders

  • More resources will be added if needed, finance minister says
  • The proportion of stressed debt jumped to 11.3% as of Sept. 30

India will inject at least 250 billion rupees ($3.65 billion) of capital into government-controlled lenders in the year starting April 1 as bad and restructured loans are set to climb from a 14-year high.

“We are now confronted with stressed assets at public sector banks, which is a legacy of the past,” Finance Minister Arun Jaitley said Monday in New Delhi while presenting the federal budget for the year ending March 2017 to parliament. The government will find “additional resources” if the banks require more money, he said.

The injection target is in line with the 250 billion rupees that the government had announced in August for the state-run lenders for fiscal 2017. The infusion will help banks to boost capital buffers while complying with a deadline set by Reserve Bank of India Governor Raghuram Rajan to clean up their balance sheets.

“Government not exceeding the infusion target announced earlier has led to disappointment among investors," Hatim Broachwala, a Mumbai-based banking analyst at Nirmal Bang Institutional Equities, said in a telephone interview after the announcement. “With banks being asked to increase provisions by March 2017 to provide for emerging stress in loan books, the requirement for infusion is higher."

The NSE Nifty PSU Bank Index, which tracks 12 state-controlled lenders, gained 0.9 percent as of 2:51 p.m. in Mumbai. State Bank of India, the nation’s largest lender by assets, pared earlier gains of 5 percent to 1.3 percent, taking its 2016 decline to 30 percent. Bank of Baroda gained 0.1 percent, while Punjab National Bank dropped 0.9 percent.

In December, Rajan set lenders a March 2017 deadline to clean up their balance sheets by increasing provisions after revamped and soured debt as a proportion of total loans jumped to 11.3 percent as of Sept. 30. Eleven state-run banks reported losses last quarter. Junior Finance Minister Jayant Sinha estimated stressed assets at about 8 trillion rupees.

ARC Rules

Jaitley also announced a change in rules to allow sponsors of asset reconstruction companies, or ARCs, to fully own the firms. These companies buy soured debt and its collateral from lenders and work to recover it by reorganizing the business and assets.

ARCs will play “a major role” in addressing the problem of stressed assets at banks, Jaitley said. He proposed amending the law to enable sponsors of reconstruction companies to hold up to a 100 percent stake in ARCs.

There are 15 asset reconstruction companies formed based on a law passed in 2002 to help reorganize non-performing credit. The current rule caps ownership by any single investor in an ARC at 50 percent.

Basel III

Rising bad debts and inadequate risk buffers at India’s state-run banks have been hindering Prime Minister Narendra Modi’s attempts to revive lending growth in the $2 trillion economy. Jaitley announced a plan in August to infuse 700 billion rupees in the government-controlled banks in four years to 2019 to help them comply with tighter Basel III rules.

Rules requiring government stakes of at least 51 percent have curtailed state banks’ ability to sell shares, making them under capitalized relative to privately owned lenders. The proportion of stressed assets at state-run banks stood at 14.1 percent of total loans as of Sept. 30, almost three times that of private sector peers, data compiled by RBI show. The government will cut its stake in IDBI Bank Ltd. below 50 percent, Jaitley said.

State-owned banks account for more than 70 percent of India’s outstanding loans. Government-controlled lenders will require infusions of 1.8 trillion rupees in equity to comply with international standards under the so-called Basel III regulatory regime, Jaitley said in August.

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