The government takes a step ahead towards cleaning up a banking system riddled with bad loans

The government takes a step ahead towards cleaning up a banking system riddled with bad loans by seeking the parliamentary approval to issue about 800 billion rupees ($12.6 billion) of bonds to fund capital injections into the banks. The government has indicated that, the better performing PSU banks would be given higher amount of funds, as a consequence, we believe State Bank of India, Canara Bank, BoB and Indian Bank are expected to be the key beneficiaries of this re-capitalization programme, as there performance is better than the other PSU banks. The PSU bank index is expected to continue its upward momentum today as well.

Prime Minister Narendra Modi’s administration expects to sell the first of its recapitalization bonds before FY18 end, as part of plans announced in 2017 to repair the balance sheets of state controlled banks, according to the proposal put to lawmakers in New Delhi on Thursday. The new bonds will carry annual interest of more than 60 billion rupees.

The government’s concrete action to clean up debt boosted the NSE Nifty PSU Bank Index as much as 2.9%, the biggest intra-day jump in two weeks. By allowing the banks to address the stressed assets weighing down their balance sheets, the government hopes to bolster growth in credit, which has fallen to a 25-year low.

The fund raising forms part of a planned Rs2.11tn capital infusion into India’s state run lenders over the next two years, announced in October 2017. The government is expected to issue a total Rs1.35tn of recapitalization bonds under the plan, with the rest of the capital injections funded from the budget and from financial markets.

Shares of IDBI Bank Ltd. led the market gains on Thursday, closing as much as 8% higher. State Bank of India closed up by 1.7%, while Bank of Baroda and Punjab National Bank added almost 4-6%.

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