India strives to compete with China in most areas, but this is one where it would be happy for the Chinese to take the lead. Fears of mounting losses on bad debts at state-backed banks in China are roiling money markets in the country this week. Not to be outdone, today India announced a massive cash injection for its state-run banks.
India’s biggest government-run lenders, which dominate the country’s financial system, will receive 140 billion rupees ($2.3 billion) in capital to guard against a rising tide of sour loans. As the economy has slowed, banks have reclassified loans that would once be considered duds as “restructured,” thanks to rules introduced in 2005 to ease the capital burden on lenders. State-backed banks have reclassified shaky loans much more enthusiastically than their private-sector rivals. Now, a fifth of these renegotiated loans are turning properly sour, threatening to overwhelm the banks’ capital cushions.
The government capital injection is a way to encourage the banks to raise more equity themselves. Since rules dictate that India’s government must maintain a controlling stake in these banks, they can only raise capital from private investors if it does not dilute the state’s stake below certain thresholds.
Although a healthy monsoon has boosted the fortunes of rural farmers, overall sputtering economic growth and the travails of India’s big banks mean that credit growth slowed to just over 13% in the three months to June, down from 18% a year earlier. Without propping up its stumbling state-owned giants, loan growth could slow further.
India’s new central bank governor Raghuram Rajan is keen to shake up its financial system, with proposals on opening it up to foreign banks expected soon. For now, though, India—like China—is scrambling to assure savers, borrowers and investors that it stands ready to deal with the hidden horrors cropping up on the balance sheets of state-run banks. It is a rivalry neither country is keen to pursue.