PSB NPAs likely to rise 2-4 pc points; may push govt to recapitalise via RBI reserves, bonds: Report
The consolidated fiscal deficit target is likely to overrun by 2 percentage points due to stimulus spends, lower tax receipts and dip in divestments, and will have to look for different ways of raising resources for recapitalisation, analysts at Bank of America said.
State-owned banks' non-performing loans are likely to rise by 2-4 percentage points, which will put up to USD 15 billion recapitalisation pressure on the government in FY21, a foreign brokerage firm said on Tuesday.
The consolidated fiscal deficit target is likely to overrun by 2 percentage points due to stimulus spends, lower tax receipts and dip in divestments, and will have to look for different ways of raising resources for recapitalisation, analysts at Bank of America said.
The government can issue recapitalisation bonds, or the RBI's huge reserves of over USD 127 billion can also be dipped into to help the state-owned bank's recapitalisation needs, it said.
There is a near-unanimity among analysts that the ongoing COVID-19 pandemic will lead to an increase in bank's gross non performing assets with some reports pegging the stock to double as well.
The brokerage said the increase in non-performing assets by 2-4 percentage points will need a government recapitalisation requirement by USD 7-15 billion.
It said the recap bonds is a tried and tested instrument which has helped the banks in the past.
"The government will infuse capital into PSU banks and fund it by issuing recapitalisation bonds to them. PSU banks will invest the capital received in recapitalisation bonds," Bank of America said.
Asserting that such a move does not entail a moral hazard, it elaborated saying PSU banks can heal their broken balance sheets and meet adequate capital requirements through the bonds and once growth recovers, the government can gradually convert these recap bonds into normal G-secs and sell them to the market.
The interest cost on the bonds will impact the Center's fiscal deficit, although that will also be partly moderated by profit transfers from PSU banks holding recap bonds, it said.
Watch Zee Business live TV below:
Recapitalisation bonds enter the fiscal deficit in the year of their maturity and it is because of this this that the bonds were issued without any fixed maturity in the past instances, it added.
Apart from the bonds, the RBI's revaluation reserves of USD 127 billion can also be deployed, it suggested, adding that such a move will be neutral from a fiscal deficit perspective.
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.
RECOMMENDED STORIES
Retirement Planning: SIP+SWP combination; Rs 15,000 monthly SIP for 25 years and then Rs 1,52,000 monthly income for 30 years
Top Gold ETF vs Top Large Cap Mutual Fund 10-year Return Calculator: Which has given higher return on Rs 11 lakh investment; see calculations
Retirement Calculator: 40 years of age, Rs 50,000 monthly expenses; what should be retirement corpus and monthly investment
SBI 444-day FD vs Union Bank of India 333-day FD: Know maturity amount on Rs 4 lakh and Rs 8 lakh investments for general and senior citizens
EPF vs SIP vs PPF Calculator: Rs 12,000 monthly investment for 30 years; which can create highest retirement corpus
Home loan EMI vs Mutual Fund SIP Calculator: Rs 70 lakh home loan EMI for 20 years or SIP equal to EMI for 10 years; which can be easier route to buy home; know maths
06:40 PM IST