India is set to increase the amount of capital it will infuse into public sector banks to $1.9 billion this year, as the first step in reforms to boost performance and tackle worsening bad debts at state lenders.
Government-backed institutions control about three-quarters of Indian deposits but have struggled over recent years in the face of mounting stressed loans, which account for about 11% of assets, Yahoo News reported.
On Friday, Arun Jaitley, finance minister, asked for approval in parliament to boost the injection of funds planned for this financial year to Rs120 billion ($1.9b), an increase of more than 50% on the Rs79 billion he had proposed in his last budget in February.
Shares in public lenders surged on the news, with State Bank of India and Bank of Baroda, two of the largest institutions, closing up about 5% in Mumbai.
India’s government is forced each year to top up capital levels at the 27 listed public banks in which it holds majority stakes. It is relatively unusual, however, for it to announce such a substantial midyear increase.
The extra funds have been interpreted as a belated recognition of the extent of problems faced by state banks, many of which are struggling to meet tough new Basel III international capital requirements.
Achieving these targets will require an injection of about $45 billion by 2019, according to Credit Suisse, a level far above that which the government has put in over recent years.
Prime Minister Narendra Modi’s administration hopes to raise some of these funds by selling down its majority holding in the banks to 52%, potentially raising as much as $26 billion if investors are willing to buy.
However, Modi has ruled out privatizing the banks, in a move that has been greeted with dismay in private by many Indian business leaders alarmed over the deteriorating health of the financial system.
In a recent note, analysts at Morgan Stanley highlighted the shortfall between the government’s capital plans and the 2019 target, arguing that a capital injection of $15 billion was needed “immediately” to return capital at public banks to “respectable levels”.
Jayant Sinha, minister of state for finance, told reporters on Friday that the capital injection would form the first installment of a “comprehensive” package of reforms to improve performance at state lenders.
“It is not just a question of recapitalization of the banks—we have to make sure our banks are on a sound footing,” he said. “So we have to look at governance reforms, NPAs, operational issues...as well as bringing new people into the banks.”
