World Bank stimulus: $4.3-bn loan to boost PSBs, IIFCL & Power Grid

The World Bank has approved $4.3 billion loans for India, including a $2-billion fund to recapitalise seven public sector banks. Along with $1.2 billion for India Infrastructure Finance Company Ltd (IIFCL) and $1 billion for the Power Grid Corporation, the loans make up the largest block released by the World Bank to India in one go. A World Bank statement said the ‘banking sector support loan’ will help India maintain the economic stimulus programme by shoring up the capital base of banks, whose capital adequacy ratio has slipped to less than 12%. “A possible second loan, for about $1 billion, is likely to be provided by June 2010,” the statement said. The loan will supplement the government’s efforts to improve the financial health of the banks as they migrate to a higher capital adequacy ratio under Basel II standards from March 31, 2009. “Supporting infrastructure is particularly important during the current crisis, not just to sustain the domestic economy at a time of reduced global demand, but even more to lay the foundations for stronger future growth,” said World Bank’s India director Roberto Zagha. As on March 31 2009, Uco Bank had the lowest capital adequacy ratio at 9.75%, followed by Dena Bank at 10.73%, Bank of Maharashtra at 10.75%, Syndicate Bank at 11.37%, IDBI at 11.57%, Central Bank of India at 11.75% and Punjab Sind Bank at 11.88%. These banks would be among the first to benefit from the recapitalisation move. India estimates that public sector banks will require an injection of at least $4.8 billion during 2009-11 to maintain credit expansion over the medium term, the World Bank said. The larger amounts of loans are also an indication of the deeper involvement of the Bank in India. The loans for the bank recap will be priced at Libor plus 0.17% and a service charge of 0.25%. With Libor at about 1.1%, the rate works out to less than 2%. The loans for IIFCL and Power Grid Corporation are at lower, at Libor minus 0.03%. The bank loans will be given as a budgetary support, which will then be used for bank recapitalisation. The finance ministry has promised to ensure banks’ capital adequacy ratio is at least 12%, more than the 9% prescribed by RBI. The IIFCL loan has a maturity of 28 years, including a grace period of seven-and-a-half years. The loan will enable IIFCL it to catalyse private financing for public-private partnerships in the infrastructure sector, the World Bank noted. It would also stimulate the development of a long-term local currency debt financing market. The loan for the Power Grid Corporation will finance the fifth power system development project to expand the electricity transmission networks in the western, northern and southern parts of India. Of the total $14 billion loans committed to India during 2009-12, the World Bank has already granted about $5 billion, including the current set....