Why India is pumping US$32bil into state banks
INDIA’S struggling state-run banks are getting state aid. Call it a recapitalisation, call it a bailout, call it what you like, the government is injecting 2.11 trillion rupees (US$32bil) over the next two years.
The move is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth erodes borrowers’ ability to repay loans.
Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy.
> How big a deal is this
Huge. The injection is more than twice the 930 billion rupees McKinsey & Co estimates the authorities pumped into state-run banks between 2009 and 2016.
> Where will the money come from According to the government, almost twothirds (1.35 trillion rupees) will be raised from so-called recapitalisation bonds. The rest (760 billion rupees) will come from “budgetary support” and the market.
There were no details about what exactly that meant, nor how the authorities will structure and price the bonds. Morgan Stanley is calling it India’s TARP – a reference to the US Troubled Asset Relief Programme implemented in the throes of the financial crisis.
> What’s the problem
Soured loans have contributed to a US$191bil pile of zombie debt that’s cast the future of some lenders in doubt and curbed investment by businesses.
Credit growth has dropped to a 25-year low, putting a drag on India’s slowing economy. The amount of stressed assets at state banks exceeds the value of the banks themselves, according to McKinsey, which warned that “as these stressed assets continue to turn bad, the entire equity base of the banks could be at risk.”
> Will the move spur lending
Not immediately. Any pick-up is likely only after the banks have strengthened their balance sheets by cleaning up some of those billions of dollars of bad loans. CLSA says the plan should satisfy more than 70% of the banks’ needs in order to raise lending.
On the other side of the equation, demand from private businesses for loans has been subdued over the past few years and must recover in order for loan growth to revive, according to Citigroup Global Markets India Pvt Ltd.
> Who will buy the bonds
Judging by history, the banks themselves. They’re flush with deposits following the ban on cash that Modi began implementing last November. Their participation would have the benefit of limiting the impact on bond markets, says Vivek Kulkarni, managing director at Brickwork Ratings.
> How will it affect government finances There’ll be little impact on its target to shrink the fiscal deficit because, under International Monetary Fund guidelines, only interest expenses will be added; an estimated 90 billion rupees each year, or 0.4% of total budgeted spending.
Although India’s accounting rules require the bonds to be included in the budget deficit, the government will probably reclassify them as off-balance sheet items, according to Kotak Mahindra Bank Ltd, as it did when similar notes were issued in the 1990s.
The plan will frontload capital injections while staggering the fiscal implications over a period of time, Reserve Bank of India governor Urjit Patel says in a statement.
> How have markets reacted
An index of state banks surged 30% on the day after the announcement, though bond investors were more circumspect on concern about an oversupply of securities.
Fitch Ratings Ltd and Moody’s Investors Service welcomed the move, with Moody’s describing it as a “significant credit positive” for banks. Ratings companies have long criticised the banks for their weak core capitalisation.
On the other hand, columnist Mihir Sharma notes that if the government excludes the bonds from its fiscal deficit calculation, it may be hard for India to claim it’s focused on fiscal restraint while it’s massively increasing public debt and that hiding the bonds from the fiscal deficit may reduce credibility in economic management. — Bloomberg