October 27, 2017

While Finance Secretary Ashok Lavasa said that the government's Rs 2.11 lakh crore bank recapitalisation plan should be considered an investment, India ratings and research is a bit wary about the result the plan is going to yield.

Finance Secretary Ashok Lavasa has said that the government will try to find space for the cost of bank recapitalisation, which is going to be just the interest on the recap bond, adding that work on recap bonds is in progress and likely to be disclosed soon. While, in an interview with CNBC-TV18, Ashok Lavasa said that the government’s Rs 2.11 lakh crore bank recapitalisation plan should be considered an investment, India ratings and research is a bit wary about the result the plan is going to yield.

The rating agency said that the injecting capital would give much-needed “manoeuvrability” to ailing banks but credit growth to large corporates, however, may still be some time away, given the limited demand in face of overcapacity in the system.

“Ind-Ra’s analysis shows that those sectors that have registered a high leverage ratio (9-10 times) and a significant decline in capacity utilisation rate to 20%-30% from 80%- 90% in FY06. Infrastructure, metals and mining, and power could remain away from capex during FY18-FY20,” India ratings and research said in a report.

“These three sectors contribute to around half of adjusted gross block. Additionally, capex spending of the top 200 asset-heavy corporates is likely to remain muted (5%-8%) and primarily focused on maintenance capex over FY18-FY20, according to Ind-Ra’s base case scenario. This is in comparison to 4% during FY13-FY17, 13% in FY09-FY12 and 49% in FY05-FY08,” the report added.

Recently, senior Rajya Sabha member Subramanian Swamy also expressed his opinion on similar lines saying that government’s recap plan is to postpone the banking crisis. He said major reforms were needed to fix Indian public sector banks that are reeling under Rs 9.8 lakh crore of bad loans.

The government, while announcing the massive recap plan, said that a series of banking reforms are in the pipeline but did not give details about what those reforms were.

Earlier in the day, Financial historian and strategist Russell Napier said that capital with banks is a good thing if it translates into credit growth. recapitalisation is not enough, and the government needs to bring their stake down. “They (PSBs) are likely to continue to make mistakes they made before. They are just focused on the short-term relief. PSBs are not prudent at making commercial decisions,” Russell Napier told ET Now.

However, Russell Napier said that the problem with PSBs in not India specific but seen globally. “Lack of money growth, lag in investment cycle are not India problems alone, it is global,” he said.

[The Financial Express]