India may need to invest up to 1.5tn rupees ($19.81bn) into its state-owned banks, whose bad loans problems have worsened since the covid-19 crisis began.
The government is considering ways to help keep the state banks afloat, as their loads of nonperforming assets are expected to double during the pandemic.
State-owned banks account for about two-thirds of assets in the banking sector.
Even before covid-19, the banks were hamstrung by bad loans and governance concerns. This prompted calls for the government to intervene by consolidating or privatising them.
With loan defaults from covid-hit consumers and businesses likely to rise further, the government has revised upwards its initial budget of around 250bn rupees for bank recapitalisations.
A persistent problem
Indian banks were already saddled with 9.35tn rupees of non-performing assets at the end of September 2019, or roughly 9.1% of their total assets at the time.
Bad loans would likely rise to 18-20% of total assets by the end of the fiscal year next March, as 20—25% of outstanding loans are considered at risk of default.
The nationwide lockdown is expected to lead to a contraction in economic growth in the current financial year.
Several global rating agencies have changed their outlook on the banking sector to negative. Most have reported that economic recovery is likely to take a long time.
The government has already pumped in 3.5tn rupees to shore up state-owned banks in the last five years.
India’s federal budget in February for the 2020-21 financial year made no provision for further capital injections, with lenders encouraged to tap capital markets to raise money instead.
It is unlikely the federal government will be able to fund the entire capital injection itself, sources say. It may have to rely on indirect measures such as issuing bonds as a means of recapitalisation, a method which it has used previously.