India to inject $1.3 bln to shore up state banks

By Devidutta Tripathy and Manoj Kumar

MUMBAI/NEW DELHI (Reuters) - India will inject 79.4 billion rupees ($1.3 billion) into state-owned banks in the next fiscal year to bolster their capital reserves, a smaller-than-expected sum which means the sector's heavyweights may have to turn to the market or curb lending.

Successive governments have poured billions into India's bad-debt burdened state banks, even while warning the support was unsustainable. The Reserve Bank of India estimates lenders need more than $40 billion to meet global Basel III norms by 2019.

The government this year injected 69.9 billion rupees into selected state lenders, picking those that outperformed their peers in terms of profitability. It also allowed banks to raise funds by selling shares, provided the government retained a stake of at least 52 percent.

In his budget speech on Saturday, Finance Minister Arun Jaitley outlined the more modest spending plans and said the government would also set up a bureau to improve governance and help state lenders develop capital-raising plans with "innovative financial methods and instruments".

This, he said, was a move towards establishing a holding company for the state's banking investments, a long-awaited step that should end state-directed lending and allow state banks to be run at arm's length.

Ananda Bhoumik, a senior director at Fitch's Indian unit India Ratings and Research, said the capital infusion was far lower than expected. The agency's forecast was 200 billion rupees.

"We expect credit growth to be in the region of 14 to 15 percent for the next fiscal year. So, based on the banks' current profitability and the expected credit growth, they would need a certain level of capital," Bhoumik said.

Bhoumik warned there would be an impact on credit growth, particularly for mid-sized banks less able to tap the market.

India's nearly two dozen state-run lenders, with state ownership of between 56 and 84 percent, dominate the country's banking landscape.

Jaitley separately announced plans to set up a bank to help fund the small businesses which make up the backbone of India's economy.

The Micro Units Development Refinance Agency (MUDRA) Bank will refinance microfinance institutions, he said, allocating 200 billion rupees to the plan.

"These bottom-of-the-pyramid, hard-working entrepreneurs find it difficult, if not impossible, to access formal systems of credit," Jaitley said. "Just as we are banking the unbanked, we are also funding the unfunded."

($1 = 61.6489 rupees)

(Additional reporting by Dipika Lalwani; Editing by Clara Ferreira Marques and David Holmes)