Modi Throws $32bn At Indian State Banks – Share Prices Surge

Tyler Durden's picture

Share prices of Indian state banks surged as the government announced it would hand over $32bn to recapitalize the sector. According to Reuters, the motivation was a bid by Prime Minister Narendra Modi to tackle a major drag on the economy that has frustrated his attempts to boost growth.

Once the world’s fastest-growing major economy, India has seen its growth rate plummet to the lowest in three years, far below levels needed to create enough jobs to absorb the million Indians joining the work force every month. Modi’s government has tried to respond by stepping up public spending, but the slowdown has stressed its finances, making it imperative that private investment picks up the slack. Officials privately admit they have struggled to revive private investment because state-owned banks, which provide much of the credit in the economy, are saddled with a mountain of bad debt…

 

Twenty-one state-run banks account for more than two-thirds of India’s banking assets. But they also account for a bulk of the record 9.5 trillion rupees ($145 billion) of soured loans. In addition to repairing their balance sheets, the banks need billions of dollars in new capital to meet global Basel III banking rules, due to fully kick in by March 2019. Fitch Ratings estimates Indian banks will need $65 billion of additional capital by March 2019 to meet Basel III global banking rules. Moody’s expects the top 11 state lenders alone will need nearly $15 billion.

That’s what we call a trend reversal…

Here is Bloomberg’s take...

India’s government has won a resounding reception from investors and credit-ratings firms for its unprecedented pledge of 2.11 trillion rupees ($32 billion) in capital for the country’s beleaguered state banks.

The move, which drove an index of government-run banks up as much as 26 percent, is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth and falling demand erode borrowers’ ability to repay loans. Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy.

“The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings Ltd. This addresses “weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”

Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state-run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the unit of Moody’s Corp., said by phone.

In the end, there was no alternative than for the Indian government to provide additional capital. While investors have shunned the state-owned banks due to poor profitability and asset quality, the situation was further complicated by the requirement for the state to maintain at least 51% ownership. Ratings agencies, Fitch and Moddy’s have been highlighting the weakness in capital ratios.

Delving into some of the details of the capital injection, Bloomberg explains, the government will sell 1.35 trillion rupees of recapitalization bonds, while banks will raise another 760 billion rupees through “budgetary support” and from the markets, according to the plan announced Tuesday. The funds vastly outstrip the 700 billion rupees that India had pledged two years ago to inject by 2019, and is likely a recognition that the government had underestimated the impact ballooning bad loans would have on credit growth…

“These funds will help in efficiently managing risk and credit capital-related requirements of the banks,” State Bank of India Chairman Rajnish Kumar said in an emailed statement.

Bloomberg summarised market reaction in stream of consciousness fashion.

Analysts say the step is “sentimentally positive” and will help lenders meet over 70% of their capital needs but lending won’t grow immediately. Punjab National Bank jumps as much as 40%, most on record; Bank of Baroda surges as much as 29%, State Bank +25%. Recapitalization amount is “huge,” will help banks meet higher provision requirements under new accounting rules starting April 2018 Citi (Manish Shukla, Abhishek Sahoo) Timely recapitalization of government banks will boost capital adequacy, even after they make provisions for soured loans However, private sector demand -- muted over past few years -- has to revive for loan-growth to recover CLSA (Aashish Agarwal, Prakhar Sharma, Aditya Jain) Plan should help satisfy more than 70% of lenders’ needs required for lending to increase, absorb “haircuts” on stressed loans Punjab National Bank, Union Bank raised to buy from sell JEFFERIES (Nilanjan Karfa) India plan is “sentimentally positive” and makes all state banks “a basket trade” Bank lending won’t improve immediately, but it “partially solves” supply of capital flow; stoking demand needs to be worked at separately MORGAN STANLEY (Anil Agarwal, Sumeet Kariwala, Subramanian Iyer) State lenders can now “take the required hits” arising from soured loans, make proper provisions, and move ahead Insolvency rule was helping bad-loan resolution, recapitalization will accelerate it NOMURA (Adarsh Parasrampuria, Amit Nanavati, Riddhi Jain) “Big state banks recap” is a game-changer; expect re-rating in state-owned banks Infusion “highly dilutive” but very positive for FY19 adjusted books

As ever, you can’t please everybody as Reuters noted...

Mohan Guruswamy, an economist in New Delhi, said the government should have taken action three years ago to revive the banking sector. "Now it's more expensive, and we will not see results soon," Guruswamy said.

 

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hedgeless_horseman's picture

 

So they printed the money out of thin fucking air and gave it to the banks for free?

Yes, I can see how this is bullish for the banks.

No so bullish for anyone foolish enough to be saving rupees.

Gold, bitchezzz!!!

 

 

Seasmoke's picture

Only question is. Why stop at $32 Billion??

hedgeless_horseman's picture

 

Stopping?  They are just getting started!

07564111's picture

yep, down the same road as others ;) That road leads to destruction of both country and society..India is fucked.

MozartIII's picture

Take away the hard cash from the small businesses to destroy their operations. Give massive cash to the banks.

 

Destroying your country as fast as you can! CHECk

Seasmoke's picture

Privatize the gains. Socialize the losses. Has gone worldwide.

nmewn's picture

They teach it at the very finest universities ya know, Princeton, Hahvaaahd, Yale, Oxford. Hell "Lord" Keynes was a Brit after all and Krugmans prolly wetting his panties jumping up & down saying it wasn't enough ;-)

Anteater's picture

Modi crushed the fuck out of the India people, like Trump is

crushing the fuck out of the USA people. Modi's phoney 

'gold bonds' succeeded in trading 10,000,000s of ounces

of real 24kt gold jewelry for a government fiat paper IOU,

just like Satoshi is trading real gold for vapor ZipBits.

Modi has been dumping those 10,000,000s of ounces

of melted down 24kt bullion on the London banks, in

return for Pound Sterling credits he can use to create

junk bonds, like this $32B junk bond promise, to buy

up and privatize the best ag lands and industries, in the

successful Ukraine model used by Israeli junta leaders,

and now being employed by Trump. Nobody will wake

up in time before we are as poor as the lowliest sadhu.

The Chosen TARP was privatization of all public wealth.

Our MC will be cut $1.5 T at a time, then SS will follow.

Hot money will increase rents above what SS supports.

The elderly and the young will be peeled off first, and

begin swelling tent cities and emergency rooms that

will look like some 3W field hospital in Afghanistan.

Get rich or die goyim. Mazel tuv!

nmewn's picture

Didn't Bareass Obama go over there and glad hand Modi after he won? Could have sworn he want on a chrysanthemum victory lap tour or sumpin ;-)

HRH Feant2's picture

I am not a trained economist. Is that what is known as helicopter money?

nmewn's picture

Yes.

But in India they operate under a caste system so, no Obama, errr, Modi-Phones ;-)

HRH Feant2's picture

Okie doke!

What about sewers and toilets? The toilet situation in India isn't that good from what I hear.

07564111's picture

Don't go for a visit, it takes a week or 2 for the brain to even _begin_ to forget the aroma.

Koba the Dread's picture

Best toilet system in the world. Never a lack of toilets. Every place you may stand, sit or lie can in the twinkling of an eye become your toilet. How's that for convenience. In addition, there is no head-scratching over which gender you may. India may have twenty-eight billion gods and goddesses, but only two sexes and only unisex toilets. . .if you're willing to accept the great outdoors as your happy dumping grounds.

Koba the Dread's picture

You're not a trained economist. Count your blessings. Economists are trained to say only what their masters order them to say. Those who are without current masters say only things that get them honorary degrees and economics prizes.

As a mathematician friend of mine at Courant Institute once commented to me, "Economics is the only 'science' in which the entire body of empirical evidence completely contradicts the entire body of theoretical thought".

 

Ben A Drill's picture

I don’t even know what that means. Why should I care?

nmewn's picture

You shouldn't, unless you're trying to convert rupee's to dollars...about 65 to 1. You're better off selling them as toilet paper...to Maduro ;-)

rlouis's picture

“These funds will help in efficiently managing risk and credit capital-related requirements of the banks,”

It should be:  “These funds will help inefficiently manage risk and credit capital-related requirements of the banks,”

 

I think we've seen this game before:  Socialize the losses and privatize the gains, AKA Heads I win tails you lose.

rf80412's picture

I think we've seen this game before:  Socialize the losses and privatize the gains, AKA Heads I win tails you lose.

"All's fair in love and war" ... and making money is both at once.

cwsuisse's picture

The problems caused by demontization can not be cured by providing capital to the lenders: Modi's advisors are stupid.

East Indian's picture

Well, Indian elites have always screwed the common people over centuries, even when they were screwed by invaders. This is one more action. Almost the whole of the soured loans have been to TPTB of Indian economy. 

 

Make the Super-rich Hyper-rich. 

onmail1's picture

Its the dictator jetley who runs economy

With taxes at GST 28% + income tax 30%

Try to compare with muslim rulers whose taxes were lower

Govt also raising prices of drinking water (privatisation probly)

when corporates run everything , they r trying to emulate USA

Good days will come only if common man is benefitted

but alas good days r meant for rich , richer & richest

pssst ... dont tell anyone , the auditors appointed by jetley's ministry

(called CAG) take huge favors from corporates

(foreign tours, jobs for dear ones etc etc)

their job, not to report any bad (& enjoy)

and various ministries use public sector to

give choice works to choice contractors

& remote control

Ministries-->Public sector-->private sector

(u can call it MPP model to hide corruption hah ha)

--------

what r u ?

a salarised person, get lost

==========

After digital economy , implement digital democracy now

(but alas the dictator jetley never gets elected)

implement all decisions of govt with the digital nod of people

everyday by clicking y/n on their cellphones

(if u can trust money transactions on phones , why not political decisons)

Let there be referendom an all decisions by govt by an app as the final word.