India’s government has won a resounding reception from investors and credit-rating firms for its unprecedented pledge of 2.11 trillion rupees ($32 billion) in capital for the country’s beleaguered state banks. The move, which drove an index of government-run banks up as much as 26 percent, is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth and falling demand erode borrowers’ ability to repay loans. Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy. “The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings Ltd. This addresses “weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”
Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state-run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the unit of Moody’s Corp., said by phone.
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, according to the plan announced Tuesday. The funds vastly outstrip the 700 billion rupees that India had pledged two years ago to inject by 2019, and is likely a recognition that the government had underestimated the impact ballooning bad loans would have on credit growth. Previous central bank Governor Raghuram Rajan had taken broad steps to bring soured credit under control, including encouraging banks to merge with each other and forcing lenders to recognize hidden bad debt. “These funds will help in efficiently managing risk and credit capital-related requirements of the banks,” State Bank of India Chairman Rajnish Kumar said in an emailed statement. Shares of State Bank of India jumped 28 percent, the most in 25 years, while Punjab National Bank soared by a record 46 percent. The PSU Index of government lenders climbed 30 percent.
Analysts were largely positive on what Kotak Institutional Equities called a “capital bazooka.” The resolution of soured credit is expected to accelerate as banks mark down their impaired loans, Kotak analysts led by M B Mahesh wrote in a report. The recapitalization will help banks meet higher provision requirements under new accounting rules starting April 2018, said analysts at CIMB Securities India Pvt. There was some caution: bank lending will take time to improve, according to Nilanjan Karfa, an analyst at Jefferies India Pvt. India’s government is providing most of the equity capital because investors are reluctant to buy shares of lenders given their concerns over profitability and asset quality. The country’s soured-debt ratio is the worst among the world’s largest economies, data compiled by the International Monetary Fund show. State-run banks account for almost 90 percent of all non-performing loans in the South Asian nation, according to Credit Suisse Group AG data.
Privately owned banks aren’t immune. Shares of Axis Bank Ltd. tumbled last week after the private-sector lender said it expects credit costs to surge because of an increase in soured debt. As of Tuesday, Fitch had a negative outlook on Indian banks based on its assessment of the sector’s weak core capitalization. Moody’s highlighted significant capital shortfalls at several banks, while assigning a stable outlook to the banking system. 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 their privately owned peers, obliging the government to support them. “This infusion also helps in maintaining overall systemic stability,” Vadlamani said.