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UTI needs $1bn to stay solvent: McKinsey

BS Banking Bureau

Global consultancy firm McKinsey in its latest report said Unit Trust of India may need $500 million-$1 billion to stay solvent.

According to McKinsey, the Indian banking system is on the verge of insolvency. To fend it off, banks will require fresh capital infusion of $9 billion-$15 billion over the next five years. This is the timeframe set by consultancy major for completion of the banking sector reforms in India.

McKinsey, in its latest quarterly report, said: "India's banking system is creaking. If the country doesn't find the capital to revive its weak public banks and to address the mounting problem of non-performing loans, its banking system will founder, with devastating consequences for the broader economy."

It added: "Some 35 domestic banking institutions, accounting for about 40 per cent of the sector's assets, are particularly fragile because of the poor quality of their assets. It is from these troubled banks that the vulnerability of India's banking system largely arises."

McKinsey mentioned that the capital required for the revival is 2 to 4 per cent of the country's gross domestic product and 50 to 90 per cent of the current capital of Indian banks. Up to 60 per cent of this sum will be required to write off irrecoverable loans, 18 per cent to finance productivity improvements, and the rest to support growth.

McKinsey suggested that the government reform and consolidate the sector and encourage strong local institutions and foreign investors to increase their presence in banking. It views that the recapitalisation out of government fund will not be easy given the high fiscal deficit. Funds raised from capital market will also not be enough.

It mentioned that in the past six years since the capital market is open to Indian banks, they could cumulatively raise only about $1.6 billion through domestic and international capital markets. In such a situation, the government will have to look to private domestic and foreign investors to revive the sector, the consultancy firm said.

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