Photographer: Dhiraj Singh/Bloomberg

India to Inject $32 Billion Into State Banks to Boost Loan Growth

  • Proposed spending is 10-fold higher than previous pledge
  • India seeks to revive bank loan growth from 25-year low

India will inject 2.11 trillion rupees ($32 billion) of capital into state-controlled lenders over two years, an amount that’s ten-fold higher than the government’s previous pledge as it seeks to revive growth in Asia’s third-largest economy.

The government will sell 1.35 trillion rupees of recapitalization bonds while banks will raise another 760 billion rupees through “budgetary support” and from the markets, Rajiv Kumar, banking secretary at India’s Finance Ministry said at a briefing on Tuesday. The government also announced plans to spend $108 billion on building highways in the next five years.

“The government is infusing this unprecedented amount to create bigger and stronger public sector banks and to ensure adequate credit for the deserving,” Kumar said.

The record capital injection and plans to spend on building roads is Prime Minister Narendra Modi’s attempt to revive an economy that’s expanding at its slowest pace in three years. The new funds will help banks, that have been plagued by rising stressed asset ratio, revive lending growth from a 25-year low. Fitch Ratings Ltd. estimates that India’s state lenders will need about $62 billion in additional capital by 2019 to meet global Basel III requirements.

“The amount announced is considerably large and is good enough to solve the capital shortage at state-run banks to a large extent,” said Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd., the local unit of Moody’s Investors Service. “This infusion will allow banks to take adequate haircuts on stressed accounts while cleaning-up the soured debt accounts.”

Asset Quality

State-run lenders including Punjab National Bank and Bank of Baroda surged earlier on Tuesday on reports that the government was planning to increase capital injection in lenders. Punjab National surged 5.5 percent, the most since July.

Modi has been under pressure to act after opposition parties made the lack of job creation and slowing economic growth a key issue ahead of crucial state elections this year. India’s economy slowed for a fifth straight quarter in the period ended June 30 aggravating stressed assets at banks. India’s lenders have more than $182 billion of soured loans, the highest among the world’s largest economies.

In February, while presenting the federal budget for the new fiscal year, Jaitley said that the government will spend at least 100 billion rupees buying shares of state-run lenders in the year to March 2018.

The government is forced to provide most of the equity capital that banks need because investors are reluctant to buy shares of lenders plagued by profitability and asset-quality concerns. The state banks’ scope to sell shares has also been curtailed by a rule requiring the government to own at least 51 percent of the lenders.

The requirement has left some of the banks, which account for about 70 percent of India’s outstanding loans, historically less capitalized than privately owned peers, obliging the government to support them.

India’s cabinet on Tuesday also approved a plan to construct 83,677 kilometers of roads, highways and bridges in next five years with funding for the project coming from market borrowing, toll collections and federal budgetary support.

— With assistance by Anirban Nag

(Adds economic data in seventh paragraph.)
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