HYDERABAD: Public sector banks may need anywhere between Rs 52,990 crore and Rs 1,13,550 crore in recapitalisation, estimates Bank of America Merril Lynch (BofMA).According to the brokerage, the proposed recap can be funded in any of the three ways: borne by the government, which is already running a high fiscal deficit; or issuance of recapitalisation bonds, or utilising the RBI’s revaluation reserves.
“Our bank analysts estimate that NPLs (non-performing loans) will likely go up by 2-4 per cent of credit. This will result in a recapitalisation requirement of $7-15 billion for PSU banks. This assumes a 10-11 per cent common equity tier 1 (CET 1) target at 10-12 per cent risk-weighted assets (RWA) growth,” noted Indranil Sen Gupta and Aastha Gudwani, economists, BofA Securities.
They noted that if funds are raised via recapitalisation bonds, banks can invest the capital received in recapitalisation bonds to mend their balance sheets and meet adequate capital requirements. Similarly, if RBI’s revaluation reserves of Rs 9.6 lakh crore or about 4.3 per cent of GDP are put to use, it should be in fiscal deficit-neutral and liquidity-neutral manner.
“Once growth recovers, the government can gradually convert these recap bonds into normal G-secs and sell them to the market, as happened in the past. That said, we argue that bank recap risks are overdone, like 2016. It is true that the Ministry of Finance will find it difficult to fiscalise PSU bank recapitalisation of 0.25-0.5 per cent of GDP. We already see slippage of 2 per cent of GDP in the consolidated fiscal deficit due to lower tax collections, a shortfall in divestment and fiscal stimulus,” they explained.