Bank recapitalisation key to revive economic growth, SMEs to benefit!

The government has just announced one of the largest bank recapitalisation programmes, to the tune of Rs 2.11 lakh crore. The sum will be available to banks over two fiscals - 2017-18 and 2017-19. The move comes at a time when banks are saddled with bad loans which required setting aside of higher capital in terms of provisioning. This had depleted their capital position. Lack of capital could impact growth of these public sector banks which controls 70% of the market. In this light, the recapitalisation exercise assumes significance, as this would provide banks with growth capital (apart from meeting provision requirement for bad loans and Basel-III norms). Read On ..

Out of the Rs 2.11 lakh crore, Rs 1.35 lakh crore will be through recapitalisation bonds, while the remaining amount will be a mix of budgetary support and fund raising from the market by the banks. Recap bonds are bonds that are issued in lieu of capital, and banks can subscribe to them via the investment book.

Till now, public sector banks were unable to raise funds from the market due to subdued stock prices. Following the recap announcement, shares of public sector banks rallied and many of them are now looking to raise funds from the market.

One important aspect of the present capitalisation programme is that the exercise will not alter the government's fiscal math, that is, this will not exert pressure on fiscal deficit which is pegged at 3.2% of the GDP for the current financial year.

"The proposed recapitalisation package for the banking sector combines several desirable features. As such, the recapitalisation bonds will be liquidity neutral for the government except for the interest expense that will contribute to the annual fiscal deficit numbers," Reserve Bank of India (RBI) governor Urjit Patel said while reacting to the announcement.

According to a report prepared by State Bank of India, during 1986 till 2001, interest paid by the Government to the nationalised banks on recap bonds works out to 0.07% of GDP per annum on average. However, during the period the banks have paid dividends to Government amounting to 0.06% of GDP on average. So, the net impact was only 0.01% of GDP on fiscal deficit, almost nil.

Commenting that the move will create investments and jobs, RBI governor Patel said a well-capitalized banking system is a pre-requisite for stable economic growth. "Economic history has shown us repeatedly that it is only healthy banks that lend to healthy firms and borrowers, creating a virtuous cycle of investment and job creation," Patel said.

Experts said the move to infuse capital in the banks will revive credit growth of banks which has been sluggish.

"We expect the growth potential of the economy to get a boost from the recovery in credit growth. Our analysis suggests that the nominal growth sensitivity to credit growth for India is at an average of 10bp for different time periods pre- and post-liberalization. As such, a 300-400bp improvement in credit growth could provide growth support of additional 30-40bp to our current expectations of 7.3% for FY19E," Elara Capital said in a note to its clients.

According to latest RBI data, year-on-year credit growth of banks has been 7.7% till middle of October as compared to 8.4% in the same period of the previous year.

There is an expectation that since the medium and small enterprises are a focus area for the government, the public sector banks should start focusing on this segment.

"PSU banks' current loan growth has been ranging between -22% to 10% and we expect it to revive over the medium term as preoccupation with asset quality takes a back seat while stronger capital levels allows them to pursue growth opportunities. The government intends to give a strong push to MSMEs/SMEs in order to boost job creation and we expect PSU banks to start focusing on this segment," brokerage house Motilal Oswal said in a note to its clients.

While the bank recap programme is appreciated by the market participants, they also highlight the need of kick starting reforms in the public sector banks, improving governance, risk management processes so that the fund infusion does not get wasted.

"While we may certainly hail the government's decision to issue recap bonds as audacious, it is important to note that the permanent solution to PSU banking crisis calls for a sustained improvement in governance, better credit appraisal standards and autonomy in decision-making, in the absence of which it could create a moral hazard for times to come," Elara Capital said.

- TradeBriefs Bureau - 

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