World Economy

India to Inject $139b in Banks to Revive Slowing Economy

India is struggling to bolster the financial footing of state banks.India is struggling to bolster the financial footing of state banks.

India will allocate 9 trillion rupees ($139 billion) to a stimulus package that injects capital into state banks and funds road construction, looking to spur investment and employment amid growing concerns over the country’s slowing economy.

State-backed banks will receive 2.11 trillion rupees during the next two years, the government said Oct. 24, while 6.92 trillion rupees will be spent over five years to build around 84,000 km of roads, Nikkei reported.

The capital injection will boost the lending capacity of state banks, Finance Minister Arun Jaitley told reporters. The government intends to issue bonds to raise over 60% of the capital, covering the rest through steps such as selling equity holdings and adjusting budget plans.

Nonperforming loans at Indian banks totaled 8.27 trillion rupees at the end of June, local ratings company ICRA said, up 170% from the end of March 2015. State-backed banks account for 7.33 trillion rupees of the bad loans, or some 90%. These banks control roughly 70% of the lending market.

A heavy dose of nonperforming loans can erode bank earnings, leaving the institutions hesitant to lend and risking stagnation of vital private-sector capital investment as a result. India seeks to bolster the financial footing of state banks in order to accelerate the disposal of bad loans and encourage lending to mainly small and midsize companies.

Jaitley blamed “indiscriminate lending” between 2008 and 2014 for the situation, saying that state banks must carry out reforms and raise competitiveness to avoid a recurrence.

Road and highway construction would create jobs while improving logistics operations around the country.

India’s real gross domestic product grew only 5.7% on the year in the April-June quarter, the slowest increase in about three years. The World Bank, the Reserve Bank of India and Fitch Ratings of the US lowered their Indian growth forecasts for the current year ending in March soon after the April-June GDP figure was announced.

The market seems to have high expectations for the stimulus measures. The Bombay Stock Exchange’s Sensex index soared over 33,000 for the first time on Oct. 25—the day after the stimulus was announced—and continued rising through Monday.

Bank stocks have climbed since the announcement. Shares of the State Bank of India, the largest commercial bank in the country, have risen nearly 30%. This institution accounts for 23% of the aggregate bad loans, according to India-based Care Ratings.

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