The entrance of Punjab National Bank's Brady House branch in Mumbai. Photo: AFP

The shares of five state-owned banks in India reacted positively during early trade on Wednesday to the government’s proposal to infuse funds to help them meet capital regulatory requirements.

The government earlier decided to infuse 113 billion rupees (US$1.65 billion) into these banks, including the scam-tainted Punjab National Bank (PNB).

The government is likely to infuse 28.2 billion rupees into PNB, 25.5 billion rupees for Corporation Bank, 21.6 billion rupees for Indian Overseas Bank, 20.2 billion rupees for Andhra Bank and 18 billion rupees for Allahabad Bank.

This is being done because these banks were unable to fund the interest payments to holders of Additional Tier 1 (AT-1) bonds. These bonds are perpetual in nature and therefore provide higher interest rates to investors than standard bonds.

Mounting bad loans and widening losses have made it difficult for these banks to service these bonds from their own earnings. As a result they were facing the risk of breaching capital regulatory norms.

This capital infusion will be a part of the 2.11 trillion rupee recapitalization plan for state-owned lenders announced by the Indian government last year.

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