October 26, 2017

The recapitalisation programme for public sector banks is likely to boost equity market sentiment as it fuels growth recovery hopes, but should be followed up with structural changes at such banks for better results, says an UBS report.

According to the global financial services major, though the recapitalisation amount may create a supportive environment for growth, it may not drive growth by itself.  The government on October 24 unveiled a Rs 2.11-lakh crore two-year road map to strengthen NPA-hit public sector banks, which includes re-capitalisation bonds, budgetary support, and equity dilution.

“We think this capital infusion can ease Ind AS adoption for state-owned-enterprise (SOE) banks and accelerate non- performing loan (NPL) clean-up,” UBS said in the research note.  The report however noted that “this one-time bailout would be wasted if it is not followed up with structural changes at SOE banks (in terms of HR practices, incentive structures and independent boards)”.  PSU bank recapitalisation however may lead to better long-term growth prospects.

“While bank recapitalisation will be neutral for GDP growth in the short term, we think it may meaningfully improve productivity dynamics and lay the foundation for stronger medium-term growth,” the UBS report said.

The capital infusion in PSBs entails mobilisation of capital, with maximum allocation in the current year, to the tune of about Rs 2,11,000 crore over the next two years, through budgetary provisions of Rs 18,139 crore, and recapitalisation bonds to the tune of Rs 1.35 lakh crore. UBS further noted that though the fiscal impact of the bank recapitalisation programme may be limited, debt-to-GDP could increase around 120 bps if the government does the issuance. “Considering that the higher fiscal deficit would not add to demand-side pressure, we expect a negligible short-term impact on CPI inflation,” the report said.

[The Financial Express]