India's massive recapitalisation still leaves banks $23b short

The government’s bailout is not enough to boost loan growth.

Banks in India still need an additional $23b in 2019 just to meet regulatory norms even after the government $32b recapitlisation programme is already underway, according to Fitch Ratings. 

The amount represents the banks still need to meet Basel III capital standards, achieve 65% non-performing loan cover and leave surplus capital for growth.

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“Much of the capital already injected by the government into state banks over the last few years has been consumed by large financial losses caused by loan loss provisions,” analyst Saswata Guha said in a report.“A large proportion of the government's latest round of recapitalisation is still likely to go towards addressing regulatory shortfalls rather than to support asset growth.” 

However, the capital rounds have allowed Allahabad Bank and Corporation Bank to leave the central bank’s prompt corrective action (PCA) framework, following earlier exits by Bank of India, Bank of Maharashtra and Oriental Bank of Commerce which frees them from tight restrictions on lending.

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However, Guta notes that more capital injections are necessary to cushion against further losses at a number of state banks as the provision cover ratio stood at around 50% in September 2018 which is still short of the 65% coverage that Fitch Ratings believe is necessary. 

The government has announced a $32b recapitalisation programme in October 2017 where it will provide banks with $21b by issuing recapitalisation bonds and $3b from the budget. The rest will be raised by banks from the equity capital markets.