Posted by on October 25, 2017 11:20 pm
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Share prices of Indian state banks surged as the government announced it would hand over $32bn to recapitalize the sector. According to Reuters, the motivation was a bid by Prime Minister Narendra Modi to tackle a major drag on the economy that has frustrated his attempts to boost growth.

Once the world’s fastest-growing major economy, India has seen its growth rate plummet to the lowest in three years, far below levels needed to create enough jobs to absorb the million Indians joining the work force every month. Modi’s government has tried to respond by stepping up public spending, but the slowdown has stressed its finances, making it imperative that private investment picks up the slack. Officials privately admit they have struggled to revive private investment because state-owned banks, which provide much of the credit in the economy, are saddled with a mountain of bad debt…


Twenty-one state-run banks account for more than two-thirds of India’s banking assets. But they also account for a bulk of the record 9.5 trillion rupees ($145 billion) of soured loans. In addition to repairing their balance sheets, the banks need billions of dollars in new capital to meet global Basel III banking rules, due to fully kick in by March 2019. Fitch Ratings estimates Indian banks will need $65 billion of additional capital by March 2019 to meet Basel III global banking rules. Moody’s expects the top 11 state lenders alone will need nearly $15 billion.

That’s what we call a trend reversal…

Here is Bloomberg’s take

India’s government has won a resounding reception from investors and credit-ratings firms for its unprecedented pledge of 2.11 trillion rupees ($32 billion) in capital for the country’s beleaguered state banks.

The move, which drove an index of government-run banks up as much as 26 percent, is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth and falling demand erode borrowers’ ability to repay loans. Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy.

“The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings Ltd. This addresses “weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”

Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state-run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the unit of Moody’s Corp., said by phone.

In the end, there was no alternative than for the Indian government to provide additional capital. While investors have shunned the state-owned banks due to poor profitability and asset quality, the situation was further complicated by the requirement for the state to maintain at least 51% ownership. Ratings agencies, Fitch and Moddy’s have been highlighting the weakness in capital ratios.

Delving into some of the details of the capital injection, Bloomberg explains, the government will sell 1.35 trillion rupees of recapitalization bonds, while banks will raise another 760 billion rupees through “budgetary support” and from the markets, according to the plan announced Tuesday. The funds vastly outstrip the 700 billion rupees that India had pledged two years ago to inject by 2019, and is likely a recognition that the government had underestimated the impact ballooning bad loans would have on credit growth…

“These funds will help in efficiently managing risk and credit capital-related requirements of the banks,” State Bank of India Chairman Rajnish Kumar said in an emailed statement.

Bloomberg summarised market reaction in stream of consciousness fashion.

Analysts say the step is “sentimentally positive” and will help lenders meet over 70% of their capital needs but lending won’t grow immediately. Punjab National Bank jumps as much as 40%, most on record; Bank of Baroda surges as much as 29%, State Bank +25%. Recapitalization amount is “huge,” will help banks meet higher provision requirements under new accounting rules starting April 2018 Citi (Manish Shukla, Abhishek Sahoo) Timely recapitalization of government banks will boost capital adequacy, even after they make provisions for soured loans However, private sector demand — muted over past few years — has to revive for loan-growth to recover CLSA (Aashish Agarwal, Prakhar Sharma, Aditya Jain) Plan should help satisfy more than 70% of lenders’ needs required for lending to increase, absorb “haircuts” on stressed loans Punjab National Bank, Union Bank raised to buy from sell JEFFERIES (Nilanjan Karfa) India plan is “sentimentally positive” and makes all state banks “a basket trade” Bank lending won’t improve immediately, but it “partially solves” supply of capital flow; stoking demand needs to be worked at separately MORGAN STANLEY (Anil Agarwal, Sumeet Kariwala, Subramanian Iyer) State lenders can now “take the required hits” arising from soured loans, make proper provisions, and move ahead Insolvency rule was helping bad-loan resolution, recapitalization will accelerate it NOMURA (Adarsh Parasrampuria, Amit Nanavati, Riddhi Jain) “Big state banks recap” is a game-changer; expect re-rating in state-owned banks Infusion “highly dilutive” but very positive for FY19 adjusted books

As ever, you can’t please everybody as Reuters noted…

Mohan Guruswamy, an economist in New Delhi, said the government should have taken action three years ago to revive the banking sector. “Now it’s more expensive, and we will not see results soon,” Guruswamy said.


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