World Bank to aid India banks in new lending plan

Indian currency notes are stapled to form a garland at a market in Jammu November 14, 2008.

WASHINGTON (Reuters) - A $14 billion World Bank lending plan for India, the biggest ever by the global lender to Asia's third-largest economy, will help recapitalize state-run banks facing liquidity strains and target the country's poorest regions, a senior Bank official said.

In an interview with Reuters, Rachid Benmessaoud, the Bank's acting country director to India, said some $3 billion of the loan will focus on areas most affected by the global financial crisis, including state-owned and housing banks, small- and medium-sized enterprises and infrastructure.

"The capital market is drying up in India and we have seen that a number of commercial state banks are not able to access long-term financing," Benmessaoud told Reuters on Friday.

"Because of the financial distress, certain companies will not be able to repay these banks so their non-performing assets are likely to increase."

He said the World Bank would evaluate the needs of the 27 state-run banks over the next month.

The $14 billion injection over three years comes as India's economy, which was expected to avoid the worst of the global financial crisis, is rapidly losing steam, with industries such as automobiles, real estate and exports reeling as the world's major economies tip into recession and credit remains tight.

Factory output in India fell for the first time in more than 13 years in October, the latest evidence of a rapid economic slowdown.

In many emerging market economies, the issue is that global markets have malfunctioned so severely that they cannot quickly access the capital they need, as banks hoard money and refuse to lend to each other.

In an attempt to ease the cash crunch in the system, the Reserve Bank of India has cut banks' cash reserve requirements by 350 basis points since August and lowered its key lending rate.

CREDIT CRUNCH

Benmessaoud said despite government action to contain the effects of the global financial squeeze, state banks remained reluctant to lend to companies.

"As a result some companies may not be able to have access to financing for their investments," he said.

The World Bank's growth projections for developing countries this week forecast India's economy would slow dramatically to 5.8 percent from 6.3 percent in 2008, with a recovery to 7.7 percent in 2010.

"Growth is a concern," Benmessaoud added.

He said the World Bank lending strategy would target increased assistance to India's seven poorest states including Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh, which account for a large number of India's poor.

Benmessaoud said lending will focus on infrastructure development, especially providing India's poorest with electricity and water, and strengthening the capacities of local authorities to use federal money more effectively.

No Indian city provides water 24 hours a day, 7 days a week, and only half the population has access to safe drinking water, while 40 percent of India's 600,000 villages are not connected to a road.

World Bank funding will also support middle-income states like Andhra Pradesh, Karnataka, Punjab, Tamil Nadu, Haryana, Gujarat, and Maharashtra by tackling poorer regions, and addressing the challenges emerging from rapid growth, compounded now by the global economic downturn.