India may cut the amount of capital it plans to inject into state-controlled lenders this fiscal year by as much as Rs78 billion ($1.2 billion) because of slow loan growth, people with knowledge of the matter said.

The government, which had promised to inject Rs250 billion into the lenders in the year ending March 31, has decided to defer Rs21 billion of the pledged amount into next financial year, the people said, asking not to be identified because the information isn’t public. It’s also considering the deferral of another Rs57 billion, they said. Finance Ministry spokesman D.S. Malik declined to comment. 

Shares of lenders including State Bank of India erased gains. Credit expansion has been the missing link in Prime Minister Narendra Modi’s attempts to spur Asia’s third-largest economy as the state-controlled banks try to conserve capital. Loan growth fell to a 25-year low last month after the government’s shock demonetization policy dented demand.

The government said in July that it would allocate Rs229 billion for 13 banks including Punjab National Bank and Indian Overseas Bank. Only about three-quarters of the money was released to the banks at the time, with the remaining Rs57 billion to be linked to factors including performance, efficiency and growth of credit and deposits.

Buffers sufficient

India can infuse the deferred Rs78 billion in the coming fiscal year, along with the Rs100 billion pledged for the period as part of the federal budget revealed on Feb. 1. Finance Minister Arun Jaitley told lawmakers at the time that more funds will be allocated "if required.”

State Bank of India, the country’s largest by assets, fell 0.6 per cent to Rs268.60 at 11:39am in Mumbai, after earlier climbing as much as 0.9 per cent. The Nifty PSU Bank Index of 11 state-run lenders dropped as much as 1.4 per cent. Punjab National Bank and IDBI Bank lost more than 3 per cent.

Current capital buffers of state-run banks are sufficient to support the slow credit demand and service bonds, the people said. The Reserve Bank of India on Feb. 2 allowed banks to use profits and statutory reserves to meet coupon payments on AT1 bonds as loss-making state lenders were struggling to make the payments.

India’s government-controlled banks are grappling with soured loans. Their gross bad debts amounted to 11.8 per cent of total loans as of Sept. 30, more than double the level of private-sector peers, central bank data show.

Source :Times Of Oman