Fitch sees $14 billion bank bailout easing India downgrade woes

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Mumbai/New Delhi: Pressure on the ratings of India’s state-owned banks is set to ease after the government unveiled plans to inject Rs88,100 crore ($14 billion) of fresh capital to help the lenders meet looming Basel norms without hurting a nascent recovery in credit growth.

“The large recapitalization is credit positive and will stem downward pressure on viability ratings, which have been cut several times over the last three-to-four years,” Jobin Jacob, a Mumbai-based associate director at Fitch, said by phone. The company may revise the outlook on Indian banks this year to stable from negative once the government begins infusing the cash, he said.

The biggest chunk of this money—Rs10,600 crore—will go to IDBI Bank, whose bad-loan ratio was 25%, more than double that of the overall industry. State Bank of India (SBI), the nation’s biggest lender by assets, will get Rs8,800 crore in the year through 31 March while Punjab National Bank (PNB) will take Rs5,500 crore, Rajiv Kumar, banking secretary at finance ministry, said at a briefing on Wednesday.

The amount is part of Prime Minister Narendra Modi’s pledge to add a record Rs2.11 trillion of capital into the lenders over two years, funded through a mix of government-issued bonds, budgetary support and cash raised by the banks themselves. Future infusions by the government will depend on reforms by the lenders, Kumar said.

These include setting up separate units to manage stressed assets and steps to sell non-core assets, as well as prudent credit growth and customer responsiveness. The 20 lenders that will receive the money have extended more than two-thirds of outstanding loans in India and account for almost 90% of non-performing debt, according to data from Credit Suisse Group AG.

“As expected, the weakest banks got the highest allocation as the government reiterated its support for all public-sector banks,” said Karthik Srinivasan, group head of financial sector ratings at Icra Ltd, the local unit of Moody’s Investors Service. “It is credit positive on a broader level as this will help them make significant headway in swiftly cleaning up their balance sheets.”

Modi’s administration also denied reports that it is considering allowing more foreign investment in India’s banking sector. There is no proposal to relax the foreign direct investment limit, economic affairs secretary Subhash Garg said.

The government is hoping that a stronger banking system will help in bolstering loan growth, which had fallen to a 25-year low in 2017, slowing the pace of economic expansion. livemint