How Paytm Went Big on Indian Demonetization
29 November, 2017
Asset allocation: conviction conflicting
1 December, 2017
Show all

Euromoney, November 29 2017

It is rare that a decision to plough billions of dollars of public money into weak banks is accompanied by an international ratings agency upgrade, but that is what happened in India recently.

On October 24, the government announced Rp2.11 trillion ($34.2 billion) of bank recapitalization measures for public-sector banks over the next two years. And on November 17, Moody’s upgraded the country from Baa3 to Baa2 – a notch above investment grade – for the first time in 14 years. Moody’s did so because it appears to believe in prime minister Narendra Modi’s reform agenda, of which the recapitalization drive is a part.

Moody’s said the upgrade rests upon an expectation “that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term”.

The public sector recapitalization is only a part of that broader agenda – other elements include the introduction of a goods and services tax, improvements to monetary policy, the use of the Aadhaar national card to boost financial inclusion and the controversial demonetization programme of last November – but it has been widely applauded by the market.

It will work like this. Some Rp181 billion will come from budgetary provisions, Rp1.35 trillion from recap bonds and Rp580 billion from capital the banks themselves are expected to raise.  The details of the recap bonds have not yet been announced, but they are expected to be similar to a programme launched in the 1990s: the government issues bonds, which are purchased by the banks; and the capital raised by those bonds will be infused into the banks as equity capital.

“From the bank’s perspective, it will convert bank liquidity in the form of cash into equity capital, which will enable the banks to meet regulatory requirements, raise leverage ratios and raise capital from the market at better valuations to support credit growth,” says Nomura economist Sonal Varma.  The interest burden on those bonds then falls on the government and will end up in the fiscal deficit, but clearly that burden is not sufficient to have alarmed Moody’s.

Read the full article here:
Visit for additional distribution rights. For more articles like this, follow us @euromoney on Twitter.

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

Leave a Reply

Your email address will not be published. Required fields are marked *