Photographer: Dhiraj Singh/Bloomberg

India to Inject $3.4 Billion to Boost Capital at State Banks

  • State Bank of India, Indian Overseas among biggest recipients
  • Banks to get 75% of funds now, rest depending on performance

State Bank of India and Indian Overseas Bank are among 13 state-owned Indian lenders that will receive a total of 229.2 billion rupees ($3.4 billion) in capital as the government seeks to contain risks in the banking industry while sustaining credit growth.

State Bank, the nation’s largest, will get 75.8 billion rupees, while Indian Overseas will receive 31 billion rupees, the finance ministry said in an e-mailed statement on Tuesday. The infusion will boost the government’s shareholdings in the lenders. A gauge of government lenders fell 0.2 percent as of 2:21 p.m. in Mumbai, paring an earlier loss of 1.1 percent.

Some 75 percent of the funds for each individual bank are being released now and the rest later depending on performance, according to the statement. The government invested about 250 billion rupees in state-run lenders last financial year and had set the same target for the current one as Prime Minister Narendra Modi’s government seeks to help lenders meet Basel III capital requirements.

“This was totally expected but the front-loading part is good news,” said Nikhil Johri, chief investment officer at Trivantage Capital Management India Pvt. in Mumbai. “Last time it was made throughout the year. This is clearly positive for the state-owned banks as their credit ratings are based on sovereign support.”

Johri said he’s been buying shares of some government banks in the past six months.

Shares of State Bank of India, which is based in Mumbai, gained 0.1 percent after falling 0.9 percent earlier. Indian Overseas climbed 1.3 percent, while Canara Bank Ltd., which is getting almost 10 billion rupees from the government, jumped 2.9 percent.

State lenders have been under-capitalized compared with their private peers because of restrictions on their ability to sell equity to raise money. That’s because government shareholdings are required to be a minimum of 51 percent. Compounding their woes are surging bad loans and weaker profitability, which led the central bank to say in June that risks to the industry had increased “sharply.”

The average capital-adequacy ratio for government-owned lenders stood at 11.6 percent as of March 31, lower than 13.2 percent for the banking system as a whole. Stressed assets -- or restructured loans plus soured debt -- stood at 14.5 percent of government banks’ outstanding credit as of March, compared with 4.5 percent for privately owned banks, central bank data show.

According to RBI rules, banks should have a minimum capital ratio of 9 percent by March 31, 2019 to comply with Basel III regulations.

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