FILE PHOTO - A man displays 500 Indian rupee notes during a rally organised by India’s main opposition Congress party against the government's decision to withdraw 500 and 1000 Indian rupee banknotes from circulation, in Ajmer, India, November 24, 2016. To match Analysis INDIA-MODI/CORRUPTION-BANKS. REUTERS/Himanshu Sharma

HONG KONG (Reuters Breakingviews) - India’s banks need a cash injection, and 2017 looks like the year that they will get it. The country reckons ailing state lenders need at least 1.8 trillion rupees ($27 billion) or more to shore up their balance sheets and meet global capital requirements. Now Prime Minister Narendra Modi may have a way to rally political support for such a move.

Bad loans are a real problem. Non-performing and stressed assets at state lenders already stood at almost 15 percent of total loans at the end of March, according to the Reserve Bank of India. But sceptics argue that providing banks a lifeline is a low priority for New Delhi. Any spare cash the government can find, they insist, is more likely to go to vote-winning issues in a country made up of 29 states and thus perpetually stuck in an election cycle.

Yet the shock decision in November to scrap almost $250 billion of high-value banknotes will help rally public support for a recapitalisation, if the resulting cash crunch hurts micro, small and medium enterprises. These businesses account for around 7.5 percent of all bank credit, excluding food-related loans, RBI data shows.

Small businesses will need easier access to credit, and in some cases, debt write-offs. But banks are currently too feeble to be much help. Fixing that problem would fit the prime minister’s effort to reposition himself as a champion of the poor who is willing to tackle elite corruption at almost any cost. Until now, discussion of bad loans has centred on big business and crony capitalism.

Modi could fund a recap by tolerating a one-off increase to the fiscal deficit, which is targeted at 3.5 percent for the current year; top economists have expressed support for such a move. That would also build on recent efforts to force banks to acknowledge that they have a problem in the first place.

New Delhi will probably prioritise any funds it can muster for the healthiest government-controlled banks like State Bank of India, the country’s largest lender, and Bank of Baroda, and force them to consolidate weaker ones. India’s banks need the money and Modi might now have a favourable way to spin it.

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