India to fix bank system with $12.6bn bond plan

Bloomberg

India took another step towards cleaning up a banking system riddled with bad loans, with the government seeking parliamentary approval to issue about 800 billion rupees ($12.6 billion) of bonds to fund capital injections into state lenders.
Prime Minister Narendra Modi’s administration expe-cts to sell the first of its recapitalisation bonds before the fiscal year ends March 31, as part of plans announced in 2017 to repair the balance sheets of state-controlled banks, according to the proposal put to lawmakers in New Delhi. The new bonds will carry annual interest of more than 60 billion
rupees, people familiar with the matter said, asking not to be named as the information is confidential.
Modi’s most concrete action to date to clean up festering debt boosted the NSE Nifty PSU Bank Index as much as 2.9 percent, the biggest intra-day jump in two weeks. By allowing the banks to address the stressed assets weighing down their balance sheets, the government hopes to bolster growth in credit, which has fallen to a 25-year low.
“Bank shares jumped as this is finally providing some clarity regarding the time frame for the capital infusion,” said Kranthi Bathini, Mumbai-based director at WealthMills Securities Ltd. “This will be another step forward in resolving the bad debt and kick starting loan growth.”
The fund-raising forms part of a planned 2.11 trillion rupee capital infusion into India’s state-run lenders over the next two years, announced in October. The government is expected to issue a total 1.35 trillion rupees of recapitalization bonds under the plan, with the rest of the capital injections funded from the budget and from financial markets. Finance Ministry spokesman D.S. Malik didn’t respond to a call seeking comment.
The clean up comes amid signs that India’s economic growth is picking up, supporting an estimate by Moody’s Investors Service that non-performing loans may peak
in 2018. The Nikkei India Services purchasing managers’ index rose to 50.9 in December from 48.5 in November, above the 50 mark that separates growth and contraction, according to data. That reversed a decline in the index in November.
Shares in IDBI Bank Ltd. led the market gains, rising as much as 10 percent in Mumbai. State Bank of India, the nation’s largest lender, rose as much as 2.4 percent, while Bank of Baroda and Punjab National Bank added almost 5 percent.