Over the next two years, New Delhi plans to pump about $32 billion into state-owned banks in a bid to increase money flow, significantly spur economic activity, loosen credit conditions, and boost investment and growth.
The Economist explains that according to the plan unveiled on October 24th, the ailing banks will lend the government $21 billion, about a third of their combined market value. The government will reinvest this money in bank shares, thus ensuring they no longer need a bail-out. Bankers are being encouraged to use a new bankruptcy code to deal with bust borrowers; raise 580 billion rupees themselves, perhaps by selling non-core assets, and receive a further 180 billion rupees from government coffers left over from a previous scheme.
The total funds for the initiative equal roughly 1.3 percent of the country’s GDP. Within one year of implementation, the drag on bank credit growth is expected to decrease by up to 10 percentage points, while GDP growth could rise by up to 5 percentage points, Goldman Sachs said.
CNBC reports that according to analysts at both Goldman Sachs and ING Bank, the Indian rupee is expected to gain in strength over the next year as a result of recapitalization.
This move is associated with risks:
Interest payment on the bond will come at a budgetary cost, which may increase government expenditure and the fiscal deficit, according to Radhika Rao, economist at Singapore headquartered DBS Bank.
The move could “sustain the risk of more public sector bank loans turning sour, swelling the country’s [bad loan] ratio,” according to a note by ING Bank.
