India’s state-owned banks need to merge into a half dozen well-capitalized institutions than can underwrite economic growth, said the head of the new Banks Board Bureau.

In addition to the $3.7 billion earmarked in the 2016/17 budget, the government is ready to inject fresh funds into the banking sector, Vinod Rai, the veteran bureaucrat appointed this year oversee the sector’s overhaul, told Reuters.

Narendra Modi
Narendra Modi

Prime Minister Narendra Modi has made restoring the banks to health a major initiative of his government. Healthy banks will be able to provide the lending and investment needed to create jobs for the million young Indians who join the labor market each month.

However, the state banks hold most of India’s $120 billion in troubled loans. Yet, they also control about 70% of all lending in Asia’s third largest economy, according to Reuters. The government set up the Banks Board Bureau in April to drive balance sheet improvement and consolidate the sector.

Rai said he would like to see the number of state banks cut to six from the current 27. But before there is any consolidation, the strong banks would need to shift bad loans off their balance sheets, while weaker banks need a capital injection.

“In the current budget, the government has put in about 25,000 crores ($3.7 billion), but it has not said that this is the end,” Rai told Reuters. “If the need arises, in the current year, the government has said it would be willing to come forward with more.”

Reserve Bank of India Governor Raghuram Rajan has set a deadline of March 2017 to clean up the sector.

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