India's government on Tuesday announced a massive bank recapitalization plan worth tens of billions of dollars — a possible "game changer" for the country's bad loans problem.
The plan could not only provide cheer for investors worried about Indian banks' worsening balance sheets, but it may also have far-reaching implications for the country's economic prospects.
The announcement has been awaited for a long time. India's growing mountain of bad loans has created weak bank balance sheets, crippling the lending ability of financial institutions and hindering the country's growth. That, in turn, makes debtors less able to pay off loans — creating a vicious cycle.
Earlier, analysts had estimated that India's banks need an additional $40 billion to $65 billion to clean up their balance sheets and to meet stricter capital requirements set by an international regulatory framework called Basel lll.
A significant capital injection from the government, however, could be a "game-changer" in breaking the cycle, Goldman Sachs said.
Many have called for New Delhi to provide more of a bailout to India's banking sector, but the government finally appears poised to address the situation.