September 23, 2009 6:12 pm

India secures $4.3bn World Bank loan

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The World Bank on Wednesday approved its largest ever annual loan package to India as it sought to speed the country’s recovery from the global economic downturn with targeted support for the banking sector and infrastructure development.

Loans of $4.3bn were intended to shore up the capital of public banks and finance infrastructure spending to help Asia’s third-largest economy recover from the “heart attack” of the global financial crisis, Roberto Zagha, the World Bank’s country director for India, said.

A day after the Asian Development Bank had upgraded its growth outlook for India, the World Bank forecast its economy would grow between 5.5 per cent and 6.5 per cent in the current fiscal year. But it warned of “uncertainty” about the pace of the recovery as New Delhi struggled to return the economy to a high growth trajectory of 9 per cent.

Mr Zagha said it was a “critical time” to offer budgetary support for the government’s stimulus programme. He emphasised the need to ensure credit flowed to productive sectors to help India bounce back in the face of unfriendly capital markets.

The worst of the crisis was over but doubts persisted over the strength of the comeback, in spite of a “quite remarkable” monetary and fiscal response by the government, he said.

A key area of concern is credit growth. Although India’s banking sector had little exposure to the toxic assets that created havoc elsewhere, $2bn of the loan package is intended as a capital injection for banks.

It will strengthen the capital of state-owned banks in a largely unreformed sector still dominated by large public institutions, and stimulate credit to business and the rural economy. Demand on public sector banks has increased as private and foreign banks have slowed their lending and deposit taking.

The capital injection, agreed after stress tests on Indian banks, will make it easier for public banks to meet a prescribed capital adequacy ratio of 12 per cent and increase credit by about 20 per cent in the current fiscal year.

A further $1bn banking support loan could be approved in the coming months.

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