Money Market Guru — India may cut the amount of capital it plans to inject into state-controlled lenders this fiscal year by as much as 78 billion rupees ($1.2 billion) because of slow loan growth, people with knowledge of the matter said.
The government, which had promised to inject 250 billion rupees into the lenders in the year ending March 31, has decided to defer 21 billion rupees of the pledged amount into next financial year, the people said, asking not to be identified because the information isn’t public. It’s also considering the deferral of another 57 billion rupees, they said. Finance Ministry spokesman D.S. Malik declined to comment.
Shares of lenders including State Bank of India erased gains. Credit expansion has been the missing link in Prime Minister Narendra Modi’s attempts to spur Asia’s third-largest economy as the state-controlled banks try to conserve capital. Loan growth fell to a 25-year low last month after the government’s shock demonetization policy dented demand.
The government said in July that it would allocate 229 billion rupees for 13 banks including Punjab National Bank and Indian Overseas Bank. Only about three-quarters of the money was released to the banks at the time, with the remaining 57 billion rupees to be linked to factors including performance, efficiency and growth of credit and deposits.
India can infuse the deferred 78 billion rupees in the coming fiscal year, along with the 100 billion rupees pledged for the period as part of the federal budget revealed on Feb. 1. Finance Minister Arun Jaitley told lawmakers at the time that more funds will be allocated “if required.”
The Nifty PSU Bank Index of 11 state-run lenders dropped 1.5 percent. Bank of India and IDBI Bank Ltd. lost 3.8 percent while State Bank of India, the country’s largest by assets, fell 0.5 percent in Mumbai, after earlier climbing as much as 0.9 percent.
Current capital buffers of state-run banks are sufficient to support the slow credit demand and service bonds, the people said. The Reserve Bank of India on Feb. 2 allowed banks to use profits and statutory reserves to meet coupon payments on AT1 bonds as loss-making state lenders were struggling to make the payments. ATI debts are perpetual bonds with equity-like features due to their loss absorption ability through either conversion
India’s government-controlled banks are grappling with soured loans. Their gross bad debts amounted to 11.8 percent of total loans as of Sept. 30, more than double the level of private-sector peers, central bank data show. — Money Market Guru | PIA