Indian Government Announced a $32.5 Billion Recapitalization Plan to Boost the Economy
Indian Prime Minister Narendra Modi Tuesday approved a 2.11 billion rupees ($32.5 billion) recapitalization plan for state-run banks over the next two years, aiming to boost the banking sector to revive the economy.
While 1.35 trillion rupees of the recapitalization plan will be bonds, Indian financial services secretary Rajiv Kumar said 760 billion will derive from budgetary support and equity insurance.
As one of the largest economies in Asia, India faced a three-year-low growth rate of 5.7 percent in the period from April to June this year.
The International Monetary Funds attributed the reason of the decline to a slowed growth momentum, which reflected “the lingering impact of the authorities’ currency exchange initiative as well as uncertainty related to the mid-year introduction of the country-wide Goods and Services Tax”. In its latest World Economic Outlook published, the IMF suggested that India enhances its corporate and banking sector as means for a strategic reform.
Modi’s Investors Service analyst Srikanth Vadlaman said that the plan would be a “significant credit positive” for India’s state-run banks, as it targets the credit sector of the banking system.
Most banks and investors hold a positive view of the recapitalization plan. “The government move was welcomed by everybody. Let’s see when the money comes in, how quick it comes in, and what the banks do with it,” said Andrew Holland, chief executive officer at Avendus Capital Alternate Strategies.
“These funds will help in efficiently managing risk and credit capital-related requirements of the banks,” State Bank of India Chairman Rajnish Kumar said.
The unveil of the plan had greatly influenced the Indian stock market. According to BSE Ltd, the benchmark BSE gained 2.4 percent this week, along with Sensex adding 0.03 percent. The state-run banks experienced great variation as well: the State Bank of India (500112.IN) gained 17.55% as Punjab National Bank (532461.IN) was up by 31%.
More than two thirds of India’s banking assets are accounted by the twenty one state-run banks. The government expects to repair its banking balance sheets through the recapitalization plan.However, to successfully revive its economy, Indian banks need billions of dollars in new capital to meet global Basel III banking rules by March 2019.
Based on the assessment of the Indian banking sector’s capitalization, Fitch Ratings had a negative outlook on the banks. It estimates that a $65 billion of additional capital will be needed to the Indian banking sector in order to meet the Basel III global banking rules by March 2019.