By Manoj Kumar
NEW DELHI (Reuters) - Finance Minister Arun Jaitley pushed back on Friday against calls to increase the allocation of funds to recapitalise state banks saddled with the bulk of the banking sector's $120 billion in sour loans.
Instead, he held out the prospect that a revival in the fortunes of borrowers would enable banks to "deprovision" some of the non-performing assets (NPAs) weighing on their balance sheets and make it possible for them to expand lending.
"Obviously banks would prefer more funds for recapitalisation but there are budgetary constraints," Jaitley told a news conference after meeting senior state bankers in New Delhi.
Jaitley has earmarked 700 billion rupees ($10.5 billion) in bank capital injections from budgets covering a four-year period ending March 2019.
As part of that plan, New Delhi injected 250 billion rupees into the banks in the last fiscal year, and has announced another 229 billion rupees in the current year.
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However, ratings agency Fitch estimates that $90 billion in capital will be needed for Indian banks to meet Basel III banking rules due to be fully implemented by March 2019. Fitch says 11 Indian banks may fail to meet those norms.
"The NPA situation is certainly not either static or permanent, because a very large bulk of it is provisioning," Jaitley said.
"Therefore, the moment that you see the revival of a sector, a lot of the provisioning itself would get deprovisioned, and the account itself would get upgraded." Jaitley had earlier said that the government stands "solidly" behind the banks.
A senior government official, who declined to be named, said after the briefing that the government disagreed with Fitch's analysis and estimated that the banks would need far less support over time.
Jaitley also said steps had been taken in two industrial sectors with the worst bad loan problems - infrastructure and steel - and added that "at some stage this problem could start to see a reversal".
(Writing by Douglas Busvine; Editing by Devidutta Tripathy and Richard Borsuk)