INDIA’s financial authorities last week grasped the nettle and agreed to a US$32 billion recapitalization of the country’s state-owned banks, which account for around two-thirds of India’s banking assets. It looked like a bold move, but was it too little too late? The story has yet to fully pan out, but I suspect it probably was.

India watchers have long fretted about the parlous state of loan books at the big government-owned landers, where the non-performing loan (NPL) ratio averages a hefty 12.6%. The glaring dichotomy between state-owned banking balance sheets and those in the private sector had reached absurd proportions and the government’s action was being cried out for. In the private sector NPLs average 4.2% – still relatively high in the global banking context.

But arguably the government should have acted sooner, given that the crimping of net interest margins in the state sector as a result of asset contraction has been ongoing for the past three-odd years. It would have been cheaper for the state had it stepped in earlier.

In the meantime, however, it appears to be too little in terms of bank capital requirements which loom on the horizon for India’s state-owned banks. Fitch Ratings estimates that India’s banking sector as a whole requires around US$65 billion of additional capital by March 2019 to meet the Basel III global banking rules.

What concerns me about the cash injection, which will be funded by the sale of recapitalization bonds together with equity cash raisings, is that it is likely to impact negatively on the government’s budget deficit. We have seen the damage that an unbalanced book is capable of inflicting on the rupee. The infamous meltdown of the currency around five years ago still lingers as a disconcerting memory.

Severe rupee weakness would serve to bloat the NPLs further. There are currently some US$145 billion-equivalent of sour loans in the Indian banking system, and an inability to service dollar-denominated debt would only add to that figure should the rupee plummet.

At least India’s financial authorities have acted, and with notable transparency. That was exemplified with clarity in the Reserve Bank of India’s insistence that Axis Bank reveal 49 billion rupees (US$748 million) of bad loans which the bank had failed to disclose. The revelation took almost 10% off Axis’ share price last week, but the ambience of transparency was welcome and one can only hope it continues to anchor the Indian financial authorities’ approach.

That strikes me as providing a sharp contrast to China’s banking industry, where NPLs are supposed to average less than 2% at the big four state-owned banks; but no one really believes that number. The modus operandi over there is certainly less than transparent but the odds of a full-blown debt crisis would seem rather low.

Whilst the recapitalization of India’s state-owned banks is welcome, the question is whether it will result in a consequent emergence of solid lending practices. If the state banks can’t compete with the private sector banks on price – and they can’t – I doubt that will happen any time soon.