Government to inject ₹2.11 trillion in India’s State-run Banks

By Shweta Arya

India’s banks received a significant boost with the Union government deciding to inject approximately ₹2.11 lakh crore worth of capital into the banking sector. Capital injection is an investment of capital into a company or institution, generally in the form of cash, equity or debt. The word "injection" denotes that the company or institution into which capital is being invested may be in financial distress. This step will help in putting Indian banks on the path to recovery from a buildup of bad loans.

When banks lend money, their loans count as an asset, since they will receive interest from the borrower and expect to have the original amount paid back in full. A loan becomes a non-performing asset, i.e. a bad loan, when the borrower defaults on the repayment for more than nine months. When a bank writes off NPAs, its capital is likely to be eroded and limits its ability to lend further. This has made it hard for banks to offer more credit or attract investment, even as the economy struggles to get back on track.

Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur our economy.

By capital injection, the government is trying to partially improve the balance sheets of public sector banks. This will also help banks write off some of the ₹10-lakh crore bad loans currently on their books. The government is hoping to do this primarily through recapitalization bonds, which will also make it easier to divest their shares. Further, there is an assumption that the recapitalization will help the banks improve their business, leading to higher profits. Estimates suggest that the public banks would require about ₹2.3 lakh crore of capital if they are to fulfil the requirements.

While banking analysts agree that putting more capital into stressed banks is a positive thing, nobody is sure exactly how much good it will do until a fine print of the whole process is available.