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The Indian government announced it would pour $32 billion into the struggling state-controlled banking system by 2020. The bulk of the money would go to the banks via recapitalization bonds, while a small portion would come from the market and budgetary support.
U.S. experts compared India Prime Minister Narendra Modi’s efforts to the U.S. Troubled Asset Relief Program which was rolled out in the context of the 2008 financial crisis.
The new program will not affect the country’s fiscal deficit, expert said, because the amount of the debt is considered as “below-the-line” financing by the IMF. But since the country’s laws require bonds to be included in the budget deficit, we may see them listed separately as off-balance sheet items. The Indian government has done so in the 1990s with the bonds it issued back then.
Lending Unlikely to See Revival
It is highly unlikely that the government’s helping hand would boost lending as local banks need to first get rid of $191 billion in toxic assets before focusing on lending. What’s more, demand has been low in the last two decades, even though 70 percent of banks would like lending to experience a revival. That could help offset the costs of some low-performing loans.
It wasn’t immediately clear how the new bonds would look like and how much they would cost. After the government releases these details, analysts will be able to tell whether India faces a liquidity shortage. If the latest plan revives lending, Indians may have to cope with accelerated inflation, which could put on hold efforts to decrease the policy rate.
Most of the bonds will be likely bought by the banks as it had happened in the past. The funds could be later turned into equity in the long run, which is a win-win situation for bankers.
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