New Delhi: India will inject at least Rs100 billion ($1.48 billion) of capital into state-controlled lenders in the coming fiscal year as the government seeks to ratchet up credit growth and bolster the economy.
The capital target was revealed on Wednesday in Finance Minister Arun Jaitley’s federal budget for the year starting April 1. While the amount is lower than the 250 billion rupees set aside in the previous budget, it’s in line with the amount the government pledged to infuse for the 2018 and 2019 fiscal years under a 2015 plan to revamp the state lenders.
“In line with the Indradhanush road map, I have provided another Rs100 billion for recapitalisation of the banks,” Jaitley told lawmakers in New Delhi. “Additional allocations will be made if required,” he said, without elaborating.
The injection is aimed at helping government banks from State Bank of India to Bank of Baroda boost capital buffers and revive loan growth, which has fallen to a 25-year low, mostly because of the nation’s crippling levels of bad debt and worsened by Prime Minister Narendra Modi’s shock demonetization policy.
State banks will require about 800 billion rupees in equity capital over the next two years to support credit growth and to comply with global Basel III norms, according to Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd., the local unit of Moody’s Investors Service.
The government will have to provide most of these funds because investors will be reluctant to buy shares of lenders plagued by profitability and asset-quality concerns, Srinivasan said by phone before the budget announcement.
Gross bad debt at the state-run banks amounted to 11.8 per cent of total loans as of Sept. 30, more than double the level of private-sector peers, central bank data show. Meanwhile, credit is growing at the slowest pace since 1992 after Modi’s Nov. 8 move to invalidate high-denomination rupee notes dented consumer demand and eroded borrowers’ ability to repay loans.
The state banks’ scope to sell shares has also been curtailed by a rule requiring the government to own at least 51 per cent of the lenders. The requirement has left some of the firms, which account for more than 70 per cent of India’s outstanding loans, historically less capitalised than privately owned peers, obliging the government to support their buffers.
The NSE Nifty PSU Bank Index, which tracks 11 state-controlled lenders, gained 2.9 per cent as of 1:28pm in Mumbai. State Bank of India, the nation’s largest lender by assets, rose 3.1 per cent, while Bank of Baroda climbed 3.9 per cent and Punjab National Bank added 3 per cent.