India set to inject $2b into ailing state banks

The latest capital infusion aims to enable banks to build capital buffers.

Bloomberg reports that the Indian government is reportedly channeling $2b into embattled state lenders as it aims to build up capital buffers and enable banks to meet coupon payments on their bonds amidst the second worst bad debt burden globally.

Also read: Bad loans bog down Indian state banks with $1.4b loss in Q4

With the recovery rate for defaulted loans at a dismal 26%, analysts believe that earlier capital injections could only cover massive losses brought about by frauds and slippages but may not stimulate further growth.

A significant amount of the capital from the government’s bailout programme may be shaved off just to meet capital requirements as global banking rules requiring banks to have 8% minimum capital ratio kicks into effect by March 2019, further aggravated by the central bank’s tightening bad loan accounting rules and withdrawal of six loan restructuring schemes.

Fraud-hit Punjab National Bank (PNB) will receive the single largest capital allocation at $405.96m (INR28b) whilst Corporation Bank and Central Bank of India follow closely at $362.29m (INR25b) and $347.55m (INR24b) respectively.

Indian Overseas Bank will receive $304.11m (INR21b) whilst Andhra Bank will enjoy $289.62m (INR20b). Allahabad Bank, on the other hand, is set to be allocated $246.18m (INR17b).

Also read: Can Indian banks weather the last wave of bad loan resolution?

“The Indian banking sector has traditionally not been aggressive in recognising and impairing stressed assets, and deteriorating asset quality in sectors like steel, construction and infrastructure remain to be fully addressed,” accounting firm Deloitte noted in an earlier report. 

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