India: INR400bn bank recapitalisation in 2019-20 to boost lending

  • The government may infuse around INR400bn into state-run lenders in 2019-20 as it looks to strengthen their balance sheets to enable them to step up lending. An announcement to this effect is expected in the Budget on 5 Jul 19.
  • A senior government official told ET on condition of anonymity that a plan is being firmed up to help banks expand credit offtake further. “This capital will be used to support credit growth and help some weaker banks maintain regulatory norms,” the official said.
  • Around five banks are still under the Reserve Bank of India’s prompt corrective action (PCA) framework, which imposes certain restrictions on lending operations. In 2018-19, the government had pumped in INR1.6tr, highest ever, into public sector banks, helping five lenders come out of the PCA framework. Some big banks such as Punjab National Bank and Union Bank of India have reported huge losses for 1Q19.
  • The interim budget presented in Feb 19 did not provide any allocation for recapitalisation.
  • As per the latest data from RBI, credit growth increased 11.7% y/y in Apr 19, higher than 10.5% in Apr 18.
  • The government expects banks to push credit at a time when the Indian economy slowed down to a quarterly five-year low of 5.83% in 1Q19.
  • However, the government termed the decline in GDP growth in 1Q19 a “temporary slowdown”, blaming it on factors such as stress among non-banking finance companies which affected consumption finance.
  • The government will also push lenders to tap into markets. Around 10 banks have government holdings of more than 75%, which need to be brought down to be in line with the Securities Exchange Board of India’s norms.
  • In a research note, Moody’s Investors Service had said the government’s funding requirements of public sector banks will shrink substantially to INR200-250bn in 2019-20 on improving asset quality.

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