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India Takes Step to Fix Bank System With $12.6 Billion Bond Plan

Indian government seeks parliament approval to issue $12.6 billion worth bank recap bonds, to be sold by March 31.

India Takes Step to Fix Bank System With $12.6 Billion Bond Plan
Indian two thousand rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

(Bloomberg) -- India took another step towards cleaning up a banking system riddled with bad loans, with the government seeking parliamentary approval to issue about 800 billion rupees ($12.6 billion) of bonds to fund capital injections into state lenders.

Prime Minister Narendra Modi’s administration expects to sell the first of its recapitalization bonds before the fiscal year ends March 31, as part of plans announced in 2017 to repair the balance sheets of state-controlled banks, according to the proposal put to lawmakers in New Delhi on Thursday. The new bonds will carry annual interest of more than 60 billion rupees, people familiar with the matter said, asking not to be named as the information is confidential.

Modi’s most concrete action to date to clean up festering debt boosted the NSE Nifty PSU Bank Index as much as 2.9 percent, the biggest intra-day jump in two weeks. By allowing the banks to address the stressed assets weighing down their balance sheets, the government hopes to bolster growth in credit, which has fallen to a 25-year low.

“Bank shares jumped as this is finally providing some clarity regarding the time frame for the capital infusion,” said Kranthi Bathini, Mumbai-based director at WealthMills Securities Ltd. “This will be another step forward in resolving the bad debt and kick starting loan growth.”

The fund-raising forms part of a planned 2.11 trillion rupee capital infusion into India’s state-run lenders over the next two years, announced in October. The government is expected to issue a total 1.35 trillion rupees of recapitalization bonds under the plan, with the rest of the capital injections funded from the budget and from financial markets.

Finance Ministry spokesman D.S. Malik didn’t respond to a call seeking comment.

India Takes Step to Fix Bank System With $12.6 Billion Bond Plan

The clean up comes amid signs that India’s economic growth is picking up, supporting an estimate by Moody’s Investors Service that non-performing loans may peak in 2018. The Nikkei India Services purchasing managers’ index rose to 50.9 in December from 48.5 in November, above the 50 mark that separates growth and contraction, according to data released Thursday. That reversed a decline in the index in November.

Shares in IDBI Bank Ltd. led the market gains on Thursday, rising as much as 10 percent in Mumbai. State Bank of India, the nation’s largest lender, rose as much as 2.4 percent, while Bank of Baroda and Punjab National Bank added almost 5 percent.

--With assistance from Karthikeyan Sundaram

To contact the reporters on this story: Siddhartha Singh in New Delhi at ssingh283@bloomberg.net, Anto Antony in Mumbai at aantony1@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Jeanette Rodrigues

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