Govt reassures state-run banks of capital infusion if bad loans surge
Photo Credit: Reuters

India has assured state banks it is ready to provide capital support as the coronavirus pandemic may lead to a surge in bad loans when economic growth is slowing, three government and banking sources told Reuters.

New Delhi may need to make a provision of at least 200-250 billion rupees ($5.90 billion) for capital infusion in state-run banks. However, this number can increase significantly as the situation evolves, the officials said.

"The NPAs (non-performing assets) could remain an issue and the government may need to make a provision for some capital infusion in the public sector banks," said a senior government official with direct knowledge of the issue.

None of the sources wanted to be named as the plan is not yet public. A finance ministry spokesman declined to comment.

The government has already pumped in 3.5 trillion rupees ($45.91 billion) in the last five years to rescue the beleaguered banks. In this financial year's budget announcement in February, it had not allocated any funds for capital infusion. Instead, the banks had been encouraged to tap capital markets for funds.

"Given the pressure on their credit profiles, we expect public sector banks' access to equity capital market will remain challenging, at least over the next few quarters," Alka Anbarasu, vice president and senior credit officer, financial institutions at Moody's Investors Service said.

Indian banks are burdened with a bad loan pile of nearly $140 billion and the lion's share of it rests with the state-owned banks. Meanwhile, loan growth for the banking industry has also plummeted to the low single digits putting a further strain on these lenders.

"We expect public sector banks will require further capital support from the government as rising asset risk will lead to a deterioration in their profitability and internal capital generation," Anbarasu added.

Moody's and Fitch group's India Ratings and Research have assigned a negative outlook for the Indian banking sector due to disruptions arising from the coronavirus outbreak.

Most lenders are likely to require capital in the second or the third quarter of this financial year and that is when they will formally approach the government if required as they already have the reassurance, bankers said.

"On top of the list right now are the mergers and to ensure how one can tackle the COVID-19 related problems. Currently, most banks are in a position to meet their capital requirement for the first half of this financial year," said the CEO of a public sector bank who declined to be named as the matter is not public yet.

In August last year, India had announced a series of mergers involving 10 state-owned banks to ensure stronger balance sheets to boost lending and revive economic growth.

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