Public sector banks' NPAs likely to rise by 2-4%; may push govt to recapitalise via RBI reserves, bonds: Report

State-owned banks' non-performing loans are likely to rise by 2-4 percentage points, which will put up to $15 billion recapitalisation pressure on the government in FY21, a foreign brokerage firm said on Tuesday

Press Trust of India May 05, 2020 14:24:26 IST
Public sector banks' NPAs likely to rise by 2-4%; may push govt to recapitalise via RBI reserves, bonds: Report

Mumbai: State-owned banks' non-performing loans are likely to rise by 2-4 percentage points, which will put up to $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 $127 billion can also be dipped into to help the state-owned bank's recapitalisation needs, it said.

Public sector banks NPAs likely to rise by 24 may push govt to recapitalise via RBI reserves bonds Report

Representational image. Reuters.

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.

Click here to follow LIVE news and updates on stock markets

The brokerage said the increase in non-performing assets by 2-4 percentage points will need a government recapitalisation requirement by $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.

Recapitalisation bonds enter the fiscal deficit in the year of their maturity and it is because of 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 $127 billion can also be deployed, it suggested, adding that such a move will be neutral from a fiscal deficit perspective.

Updated Date:

also read

COVID-19 update: India reports 2,841 new cases, nine deaths in last 24 hours, active cases dip to 18,604
India

COVID-19 update: India reports 2,841 new cases, nine deaths in last 24 hours, active cases dip to 18,604

The fresh COVID-19 infections reported on Friday were marginally higher than 2,827 cases logged on Thursday. The daily positivity rate was recorded at 0.58 per cent, while the weekly positivity rate was 0.69 per cent

India logs 2,202 new COVID-19 cases in last 24 hours, down 11.45% from day ago; daily positivity rate up at 0.74%
India

India logs 2,202 new COVID-19 cases in last 24 hours, down 11.45% from day ago; daily positivity rate up at 0.74%

India now has 17,317 active cases of COVID-19, a decline of 375 cases in the active caseload in a span of 24 hours. The active cases now comprise of 0.04 per cent of the total infections

SII seeks permission for next trial of Covovax as booster dose in children aged 2 to 18 years
India

SII seeks permission for next trial of Covovax as booster dose in children aged 2 to 18 years

The Drugs Controller General of India (DCGI) had granted permission in March for conducting Phase-3 clinical trial of Covovax as a booster dose in adults