Mumbai: Confidence in Indian banks is rising the most in Asia as Prime Minister Narendra Modi gave lenders more leeway to raise funds in bond and stock markets.

The average cost of credit-default swaps insuring the debt of five local lenders against non-payment slid 107 basis points in 2014 to 206, according to data provider CMA. A similar gauge for the region fell 13 basis points to 71. India allowed banks to issue long-term bonds exempt from reserve requirements this month, and said it will let state lenders sell shares to meet 2.4 trillion rupees ($40 billion; Dh146.2 billion) of fund requirements by 2018 for complying with tighter global capital standards.

Increased policy support may help shore up profitability now at a 12-year low, according to CARE Ratings, at a time when the central bank Governor Raghuram Rajan’s efforts to rein in bad loans are starting to show results. Non-performing debt as a proportion of total advances fell to 4 per cent as of March 31 from 4.2 per cent in September, which was the highest since 2005-2006, the RBI reported in June.

“With India announcing its intention to bring down its stake in state-run banks, there is finally a plan to fund their large capital needs,” Arindam Saha, a Kolkata-based analyst at CARE Ratings, said in a phone interview on July 15. “This will place them in a better position to boost profitability at a faster pace when the economy revives.”

Policymakers are stepping up efforts to make lenders more resilient after the Reserve Bank of India warned of increased risks to their stability last month. The return on equity of local banks, a gauge of profitability, fell to 9.6 per cent as of March 31, the lowest since at least 2002, the RBI said in a June 26 report. Earnings shrank as economic growth near a decade-low curbed lending and led to higher provisions for bad loans.

Under the new rules for long-term debt offerings, banks may sell rupee bonds that have a minimum maturity of seven years and are free from reserve needs that add to borrowing costs. Lenders are allowed to issue such notes to fund lending to infrastructure projects and for low-cost housing.

“Exemptions on reserves give banks access to funds at comparatively cheaper rates,” M. Narendra, chairman and managing director of Chennai-based Indian Overseas Bank, said in a telephone interview. “We are planning to raise funds through this avenue to finance existing infrastructure loan book and to do incremental lending.”

Presenting his debut budget on July 10, Finance Minister Arun Jaitley unveiled plans cut federal holdings in lenders by allowing them to sell shares to the public. That would help financial institutions meet capital requirements that are part of the so-called Basel III regulatory regime.

State-controlled banks, which account for more than 70 per cent of India’s outstanding loans, have historically been under-capitalised relative to privately owned peers as a 51 per cent government ownership requirement curbs the scope those banks have to raise capital by selling shares. This in turn limits their capability to boost lending, or requires the government to inject cash into the banks.

Rising confidence in Indian lenders has fueled a decline in their debt costs. The rate on five-year AAA bank debt slid 39 basis points, or 0.39 percentage point, this year to 9.18 per cent, according to indicative rates compiled by Bloomberg. Ten-year government yields fell 13 basis points in the same period to 8.7 per cent.

The yield on the benchmark 8.83 per cent sovereign notes due November 2023 fell eight basis points to 8.69 per cent Monday, while the rupee was little changed at 60.305 per dollar.

Easier access to funding may allow banks to spur lending by passing on cost savings to their customers. Loans in India grew an average 13.6 per cent in June from a year earlier, a pace that’s close to a five-year low of 13 per cent reached in May, central bank data show.

“These measures will enable banks to give a fresh impetus to their core business, which had been languishing for some years,” S.S. Mundra, Mumbai-based chairman at state-owned Bank of Baroda, said in an interview on July 17. “We believe the whole economic cycle will move once banks are able to raise capital and increase lending.”