India working on package to help ailing state-run banks

NEW DELHI (Reuters) - India is drawing up a comprehensive package to help state-run banks, Minister of State for Finance Jayant Sinha said on Wednesday, as part of efforts to nurse them back to health and improve the flow of credit to industry.

State lenders, which dominate India's banking system, were hit hard by a surge in bad loans after a slowdown in economic growth following the 2008 global financial crisis.

Stress tests carried out by the Reserve Bank of India (RBI) showed that gross non-performing assets (NPAs) as a ratio of total loans could rise to 4.8 percent by September from 4.6 percent in March, before dipping to 4.7 percent by March 2016.

The last week blamed rising bad loans for making lenders reluctant to pass on cuts in interest rates to borrowers and approve new loans.

"NPAs are simply a symptom of the underlying issues that need to be resolved," Sinha told a gathering of private equity investors. "We are preparing a comprehensive package which we will bring out shortly."

As part of the package, New Delhi is trying to improve corporate governance and strengthen management at state-run banks, Sinha said. It is also overhauling annual targets for public sector lenders to increase the focus on efficiency.

The government has also agreed to inject about $3 billion into the banks this fiscal year and could double that amount next year to shore up their capital.

But private analysts reckon the banks need much more. Ratings agency Fitch estimates Indian lenders need more than $200 billion to prepare for the full implementation of new international capital adequacy rules in the next four years.

Sinha said he would meet banks over the next two days in Bangalore to fine-tune their capital-raising plans.

"We are trying to understand exactly what's their capital requirement going to be in the next one to three years," he said. "We are there to support and provide them the capital."

(Reporting by Rajesh Kumar Singh; Editing by Douglas Busvine and Alan Raybould)