India plans to inject more funds into state banks as bad loans soar

Mumbai/New Delhi: India is preparing to pump in a higher-than-anticipated capital sum into poorly performing state banks, government sources said, a move that could see New Delhi infuse as much as $34 billion additionally and make it harder to hit planned deficit targets.

Prime Minister Narendra Modi's government in August pledged to put in 700 billion rupees ($10.2 billion) into state-run banks through four years to March 2019 as part of a broader banking reforms programme. It had then said the lenders would raise another 1.1 trillion rupees from the financial markets.

But a surge in provisions for bad loans in a central bank-directed balance sheet clean-up exercise has sent several lenders into losses, hammering their stock prices and limiting their ability to secure external funding as the economy wobbles.

It also means Finance Minister Arun Jaitley will have to squeeze the national budget to foot the bill."Indian public sector banks may find it difficult to raise capital, given their currently weak operating performance," Standard & Poor's credit analyst Deepali Seth said in a report, highlighting a risk of further rating downgrades.

"These banks will therefore have to rely more on government support for capital infusions."Two senior government officials with direct knowledge of the matter said a new capital-infusion plan was being formulated that Jaitley might propose as early as the end of this month when he presents the federal budget. They did not say how much more the government was targeting injecting into the banks.

A finance ministry spokesman did not immediately respond to a request for comment.India Ratings and Research, a local affiliate of Fitch, reckons the government will have to cough up at least 1.26 trillion rupees, nearly double of what it originally planned, to keep its current ownership of state banks. But the figure might swell to as much as 3 trillion rupees if the lenders fail to raise funds from markets, it said.

"Right now it's a tightrope walk," said Abhishek Bhattacharya, co-head of financial institutions at India Ratings. A sharp slowdown in India's nominal economic growth, which drives tax revenues, has already made it tougher for Jaitley to meet a target of trimming the fiscal deficit to 3.5 percent of GDP in the year that begins in April from the 3.9 percent budgeted for this year.

Bhattacharya said the extra burden of capital infusion could add 35-40 basis points every year to the deficit over the next three years.In a Twitter post on Friday, the finance ministry quoted Jaitley as saying that the government is "committed to protect the banks and give them the capital requirements"."Bad loans are there but banks are equipped to deal with these issues," Jaitley said.

Growth capital

Banks are the main source of funding for infrastructure and other investment projects, and capital constraints at the banks could throttle a nascent recovery.Big quarterly losses at lenders including Bank of India and Indian Overseas Bank mean some of them will need more capital sooner than expected to grow lending. Bank credit growth last fiscal year fell to its slowest in nearly two decades.

With all state-run banks, including top lender State Bank of India, trading at a steep discount to their book values, selling shares at dirt-cheap valuations is not an option. Ashwani Kumar, chairman at Dena Bank that is in talks with the government for capital support, said the original capital infusion plan was based on parameters including profitability of lenders, pace of bad loan additions and banks' ability to raise funds from the market."If those parameters don't hold good, they have to put in more money," he said.