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HomebanksIndia's troubled banks desperately need more money — but government help just...

India’s troubled banks desperately need more money — but government help just isn’t coming

  • India's banks have struggled with high levels of bad debt, which are crippling their ability to lend and spur investments in Asia's third-largest economy
  • Despite all the Indian government has done to revitalize the banking sector, one element is still missing from its effort: its not giving out enough money
  • Several banks have made plans to raise funds on their own, including selling assets and issuing bonds

Despite all that the Indian government has done to revitalize the country's struggling banking sector, one crucial element remains missing from its effort: New Delhi isn't forking over enough cash.

The lack of liquid funds at a time when non-performing assets remain at high levels has incapacitated the banks' ability to lend and spur investments — the two major challenges confronting India, according to Finance Minister Arun Jaitley.

A customer is seen outside the State Bank ATM in Jaipur, Rajasthan, India.Sanjit Das | Bloomberg | Getty Images

Growth in Asia's third-largest economy slowed to a three-year low of 5.7 percent in the April-to-June period, according to official data. Many analysts blamed the slowdown on the introduction of the new Goods and Services Tax and the recent ban on high-value notes. Propping up the banking sector, experts say, would get the economy going again.

This year, the government has consolidated operations of several state-owned banks to strengthen them and it enacted a new bankruptcy law to speed up insolvency cases, but there has been little indication that rescue will come in the form of capital.

Some analysts said the government's relative silence on that front was partly due to its challenging fiscal position. India exhausted 96 percent of its full-year deficit target in the first five months of its fiscal year, limiting its spending power to boost growth.

"Like most banking systems in Asia, India is also seen as possessing strong government support but this view has recently come under some uncertainty," CreditSights analysts wrote in a recent report. "We think the government will continue to support the public sector banks and its reluctance to recapitalize them to stronger levels in part reflects a desire to impose more discipline on the banks."

Analysts estimated that Indian banks need an additional $40 billion to $65 billion to clean up bad loans on their balance sheets and meet the stricter capital requirements set forth in an international regulatory framework called Basel lll.

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