India will set up a company to manage bad debt for banks, which is expected to reach record levels this year, threatening financial stability in the world’s second-most populous nation.
The firm will hold problem loans for banks, which can then be sold on to investors at a reduced price, according to plans outlined by Finance Minister Nirmala Sitharaman in a budget speech on Monday. An index of bank shares surged the most since May.
Indian lenders -- like global peers -- are struggling with the economic fallout of the coronavirus , which has triggered an unprecedented economic slump hurting borrowers’ ability to repay debts. Banks were already weakened by a two-year-old shadow lending crisis and are now struggling with one of the worst bad-loan ratios among major nations.
The Reserve Bank of India expects non-performing assets will rise to 13.5 per cent of total advances by the end of September from 7.5 per cent a year ago, according to its semiannual Financial Stability Report published last month. If the number holds through the fiscal year ending March 2022, it would be the worst since 1999 and one of the highest levels among major economies.
Shares of Indian lenders surged with the main banking barometer climbing as much as 6.5 per cent after the announcement of the stressed asset management company.
Separately, the government plans to pump 200 billion rupees ($2.7 billion) into state-run lenders from April 1, to boost lending in a nation that’s set for its worst contraction since at least 1952, Sitharaman said.
These measures follow a 200 billion rupee budgeted infusion in the year ending March 31, but falls short of estimates from ICRA Ltd., the local ratings arm of Moody’s Investors Service Ltd., which expected infusion of 430 billion rupees.
While private banks raised about 700 billion rupees in equity capital last year, state-run peers have mainly relied on capital bonds and private placements. As a result, many government-owned banks have cut lending after bad loans spiked and capital waned. Overall lending has slowed to 3.2 per cent this financial year after dropping to a multi-decade low of 6.1 per cent in the year ending March 2020.
Sitharaman also outlined plans to privatise two more state lenders and a state-run insurance firm, in addition to IDBI Bank.
After completing a mega-merger in 2019 that reduced the number of large state banks to 12 from 27, the government has been looking to reduce its stake in some lenders to raise much-needed cash.
The government will also start the sale of a stake in Life Insurance Corp. after announcing the plans a year ago, Sitharaman said.