Fitch, Moody’s laud recapitalisation move
NEW DELHI
INDIAN banking shares soared yesterday, sending indexes to record highs after the cabinet approved a 2.11 trillion rupees (RM135.3 billion) plan to recapitalise state banks over the next two years, although uncertainty remains on how the injections will be structured.
With the plan, Prime Minister Narendra Modi is bidding to tackle a major drag on the economy that has frustrated his attempts to boost growth.
Investors welcomed the news, sending shares of State Bank of India, the biggest lender, up 25 per cent to its highest since January 2015. The benchmark NSE index rose 1.3 per cent, hitting a record high.
But details of how New Delhi will fund the injections remain unclear. Also, questions remain about whether it would add to the country’s fiscal deficit at a time markets are already doubtful India can meet its 3.2 per cent target of gross domestic product for the year ending March next year.
The government will also use 180 billion rupees left from its previously budgeted recapitalisation fund.
Analysts predict recapitalisation bonds would likely involve selling debt to lenders, with the government then injecting the capital back into state-owned banks, potentially in exchange for increased equity stakes in the sector.
The government could also seek to avoid adding to its fiscal deficit by funding the injections through state-owned bodies rather than directly, an accounting sleight-of-hand that could allow New Delhi not to count the expenditure as part of its budget. Reuters NEW DELHI: India’s plan to inject an unprecedented 2.11 trillion rupees (RM135.3 billion) into statecontrolled banks will bolster their risk buffers and support the financial system, said two major credit-rating companies.
“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 capitalisation, 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 was a “significant credit positive” for India’s state-run banks.
The amount of capital pledged was enough to address the lenders’ solvency challenges and recapitalise them adequately, said Vadlamani, who is vice-president of the financial institutions group at the unit of Moody’s Corp.
As of Tuesday, Fitch had a “negative” outlook on Indian banks based on its assessment of the sector’s weak core capitalisation. Moody’s highlighted significant capital shortfalls at several banks, while assigning a “stable” outlook to the banking system. Bloomberg