India to inject $3.4b to boost capital at state banks

Mumbai: State Bank of India (SBI) and Indian Overseas Bank (IOB) are among 13 state-owned Indian lenders that will receive a total of Rs229.2 billion ($3.4 billion) in capital as the government seeks to contain risks in the banking industry while sustaining credit growth.
State Bank, the nation’s largest, will get Rs75.8 billion, while Indian Overseas will receive Rs31 billion, the finance ministry said in an e-mailed statement on Tuesday. The infusion will boost the government’s shareholdings in the lenders. A gauge of government lenders fell 0.2 per cent as of 2:21pm in Mumbai, paring an earlier loss of 1.1 per cent.
Some 75 per cent of the funds for each individual bank are being released now and the rest later depending on performance, according to the statement. The government invested about Rs250 billion in state-run lenders last financial year and had set the same target for the current one as Prime Minister Narendra Modi’s government seeks to help lenders meet Basel III capital requirements.
“This was totally expected but the front-loading part is good news,” said Nikhil Johri, chief investment officer at Trivantage Capital Management India in Mumbai. “Last time it was made throughout the year. This is clearly positive for the state-owned banks as their credit ratings are based on sovereign support.”
Johri said he’s been buying shares of some government banks in the past six months.
Shares of State Bank of India, which is based in Mumbai, gained 0.1 per cent after falling 0.9 per cent earlier. Indian Overseas climbed 1.3 per cent, while Canara Bank, which is getting almost Rs10 billion from the government, jumped 2.9 per cent.
State lenders have been under-capitalised compared with their private peers because of restrictions on their ability to sell equity to raise money. That’s because government shareholdings are required to be a minimum of 51 per cent. Compounding their woes are surging bad loans and weaker profitability, which led the central bank to say in June that risks to the industry had increased “sharply.”
The average capital-adequacy ratio for government-owned lenders stood at 11.6 per cent as of March 31, lower than 13.2 per cent for the banking system as a whole. Stressed assets — or restructured loans plus soured debt — stood at 14.5 per cent of government banks’ outstanding credit as of March, compared with 4.5 per cent for privately owned banks, central bank data show.
According to RBI rules, banks should have a minimum capital ratio of 9 per cent by March 31, 2019 to comply with Basel III regulations.