A state-run Allahabad Bank branch in New Delhi. Photo: AFP

The Indian government has decided to inject 482 billion rupees (about US$6.8 billion) into 12 ailing state banks to improve their balance sheets.

Most of the banks are currently under the prompt corrective action (PCA) framework formulated by the Reserve Bank of India due to their weak financial position.

The recapitalization will be done via bonds. With the latest round, the government will have pumped 1.89 trillion rupees ($26.6 billion) into state-run banks since it announced a recapitalization plan in October 2017.

The government claims it has rewarded better performing banks with a higher allocation to help them emerge from the PCA framework. Nearly one-third of the latest outlay will go to Allahabad Bank (90.9 billion rupees or $1.3 billion) and Corporation Bank (69 billion rupees or $983 million).

Two state banks – Bank of India and Bank of Maharashtra – have already exited the PCA framework and they will receive capital of 46.4 billion rupees ($652 million) and 2 billion rupees ($28.8 million) respectively to boost their balance sheets.

The recapitalization will also help Punjab National Bank (59 billion rupees or $830 million), Union Bank (41 billion rupees or $578 million), Andhra Bank (32.6 billion rupees or $458 million) and Syndicate Bank (16 billion rupees or $225 million) avoid falling into the PCA framework.

Early last year, the Punjab National Bank was rocked by the biggest banking fraud in India’s history after diamond merchant Nirav Modi swindled the bank out of nearly $2 billion. However, the bank has improved its finances and posted a profit in the December quarter after it set aside funds to cover those losses.

The other banks to receive an allocation include Indian Overseas Bank (38 billion rupees or $535 million), Uco Bank (33.3 billion rupees or $468 million), United Bank (28.4 billion rupees or $399 million) and Central Bank (25.6 billion rupees or $360 million).

According to a Reserve Bank projection, the ratio of gross non-performing assets (NPA) in the banking system is expected to drop for the first time in almost a decade to 10.3% by the end of 2018-19, from 11.2% a year ago. This is mainly due to easing concerns about state banks’ NPAs, which account for a huge proportion of the country’s bad loans.

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