Standard and Poor: Indian Banks Facing Solvency Crisis

Published December 19th, 2000 - 02:00 GMT

India's banks are facing a solvency crisis and require 11-12 billion dollars in new capital to support losses embedded in bad assets, international credit ratings agency Standard and Poor's said Tuesday. 

The capital injection will be necessary to maintain solvency in line with the minimum regulatory levels operating in India, the agency said in a statement. 

The estimate took into account the "moderate reported capital position" of Indian banks, as well as the growing level of non-performing assets and the "inadequate" reserves set aside to absorb likely losses. 

"This recapitalization estimate focuses only on credit risk and does not factor in any capital requirement for market or operational risks, and would be even higher if minimum capital standards are adjusted to reflect India's high economic and industry risks," the statement said. 

Additional capital will be required to support growth in the banking system, which is "outstripping" what normal, internal capital generation can support. 

"Profit pressures from rising competition and the significant information technology investment requirement at many scheduled commercial banks also are exacerbating this position," it added. 

Standard and Poor's said the capital shortfall was especially severe in the state-run sector, which has a long history of weak credit systems and practices. 

State-owned banks account for around 80 percent of the assets of all Indian commercial banks. 

The Indian government is planning to amend legislation, allowing the reduction of its stake in state-run banks from the current 51 percent minimum to 33 percent. 

The move is aimed at reducing the financial drain of the banking system on government resources, but Standard and Poor's sounded some warning bells. 

"Privatization may not necessarily lead to greater autonomy of the government-owned banks in seeking out new opportunities and improving overall performance," it said, pointing out that the government was like to retain a large degree of managerial control. 

Such a scenario could see the government in confrontation with private shareholders, who would be motivated by commercial considerations. 

"Additionally, the government's potential for successfully privatizing weak public-sector banks is limited by the high restructuring cost needed to financially restore weak banks to a business and financial position where they can attract private or foreign investors," the agency said -- BOMBAY (AFP)  



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