India to infuse 38 bln rupees into 3 banks

New Delhi: The government will infuse 38 billion rupees into three state-run banks by the end of March 2010, a minister said on Wednesday, helping their shares extend gains in a market that ended almost unchanged.

Indian banks have been unable to raise fresh equity after the global financial crisis roiled Indian markets, but they have to adhere to the Reserve Bank of India's capital adequacy rules and meet rising demand for loans needed to prime the slowing economy.

On Wednesday, Home Minister Palaniappan Chidambaram said the federal cabinet approved a proposal to put funds into UCO Bank, Central Bank of India and Vijaya Bank by subscribing to their shares.

"Today accessing the capital market is not a viable option. Capital is required. Therefore, we decided to infuse capital," Chidambaram told a news conference.

UCO Bank will get 12 billion rupees -- 4.5 billion rupees in FY09 and the remaining 7.5 billion next fiscal, he said.

Central Bank of India will get 7 billion rupees each this fiscal and the next, while Vijaya Bank will get 5 billion rupees in FY09 and another 7 billion rupees in FY10.

The news helped shares of the three banks up by 3-5 per cent.

HIGH CREDIT DEMAND

Indian banks are pressed for fresh capital to comply with the central bank's norms on meeting capital to risk-weighted assets ratio (CRAR), or capital adequacy ratio, by end March.

"The policy is that we will recapitalise all banks to ensure all of them reach to a 12 per cent CRAR," Chidambaram said.

The funds would also enable banks scale up lending to sectors such as manufacturing and infrastructure which are witnessing a sharp slowdown.

Bank loans grew 22.1 per cent in the year to January 16, much lower than the 30 per cent growth seen two years ago when the economy was growing at a scorching pace of more than 9 per cent. India's GDP is seen growing 7.1 per cent in the year to March.

As signs of a slowdown showed in falling factory output, exports and car sales, the government urged banks to pass on the benefits of its aggressive monetary easing to borrowers by cutting lending rates and boosting loan growth.

But banks are yet to match the Reserve Bank of India's 350 basis point reduction in its key lending rate since October.