India to more than double capital injection in state banks to $3 billion

By Neha Dasgupta and Abhishek Vishnoi

MUMBAI (Reuters) - India plans to inject about $3 billion into state-owned banks this fiscal year and could double that amount next year in a push to boost capital and help lenders meet the global Basel III regulatory requirements, Finance Secretary Rajiv Mehrishi said.

The planned capital infusion into the state lenders, which account for more than 70 percent of all outstanding bank loans, is more than double an earlier estimate of 79.4 billion rupees ($1.25 billion) made in the government's budget for this fiscal year.

It was unclear, however, what impact the increased funding would have on the fiscal deficit, which the government has targeted at 3.9 percent of GDP.

"What we are aiming at is an infusion of about $3 billion in the current year and perhaps twice as much in the next year," Mehrishi told news local news channel CNBC-TV18, during a visit to the United States with Finance Minister Arun Jaitley.

Shares of most state-run banks rose on the news, with Punjab National Bank gaining as much as 4.9 percent.

A slowing economy and stretched corporate balance sheets have led to a surge in bad loans at Indian banks. State-owned lenders have amassed bad loans at a faster pace than their privately owned peers, raising doubts about their ability to meet tougher global regulatory capital requirements.

Rating agency ICRA estimates non-performing loans at state banks this fiscal year to rise to between 5.3 percent and 5.9 percent of total loans from 4.4 percent in the year that ended March.

Morgan Stanley estimated this month the government would need to inject $15 billion across all state banks "urgently" to achieve a common equity tier 1 ratio of around 10 percent.

Mehrishi said the government could finance the increased funding through off-budget means, but gave no further details.

It was also not immediately clear if the government would require banks to fulfil certain conditions to be eligible for grants. When it announced its previous plans for the $1.25 billion capital injection, the government had said the top most profitable banks would be eligible.

Mehrishi and finance minister Jaitley are in the United States to promote investment in India.

($1 = 63.6100 rupees)

(Editing by Rafael Nam and Miral Fahmy)