India to Inject Another $10.2 Billion Into State-Run Banks

(Bloomberg) -- India will inject another 700 billion rupees ($10.2 billion) into state banks, giving them a bigger cushion to absorb loan losses and bolster credit growth at a time when the country’s shadow banks are in retreat.

The new infusion will “boost capital so that credit can be further improved,” Finance Minister Nirmala Sitharaman said on Friday, while presenting the federal budget for the year to March 2020. New measures will be introduced to improve governance at the state lenders, she added, without giving details.

Boosting credit growth is a key goal of Prime Minister Narendra Modi’s government, as it seeks to revive the economy and offset the effects of a shadow banking crisis that has been unfolding since September.

Capital injections into government-controlled banks have been rising in recent years, in a bid to help the firms deal with a bad-loan legacy that has crippled the balance sheets of several state lenders. But just as Indian banks emerge from that three-year struggle, they face the possibility of a spate of debt defaults by non-bank finance companies, which could presage a new wave of stressed assets.

Loan growth at Indian banks accelerated to nearly 9% in the six months ended March 31, more than double the 4% rate in the previous six months, according to the Reserve Bank of India. But that may not have been enough to offset the decline in credit extended by the struggling shadow banks, according to CARE Ratings analyst Mitul Budhbhatti.

“It is difficult for banks to immediately bridge the gap left by a slowdown by NBFCs,” Budhbhatti said, speaking before the budget announcement. “That would mean overall availability of credit coming down and cost of credit for borrowers rising.”

A year after a series of defaults by Infrastructure Leasing & Financial Services that exposed the weakness in India’s shadow banks, the problem is deepening with other NBFCs such as Dewan Housing Finance Corp. and Anil Ambani’s Reliance Capital Ltd. struggling to find new money.

The latest budgeted infusion into state banks is below the 1.06 trillion rupees injected in the previous fiscal year, and the 900 billion rupees in 2017/18.

To contact the reporter on this story: Suvashree Ghosh in Mumbai at sghosh186@bloomberg.net

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

©2019 Bloomberg L.P.