The Finance Ministry has announced a Rs 2.11 trillion bank recapitalisation plan for state-owned lenders weighed down by bad loans, in a bid to stimulate the flow of credit to spur private investment. Secretary in the department of financial services, Rajiv Kumar said recapitalisation will ensure genuine borrowers get adequate funding. The government seeks to kickstart the private sector investment cycle to boost the Indian economy that grew 5.7 per cent in the quarter ended June, slowest in three years. Details of issuance of recapitalisation bonds are yet to be revealed.
Finance Minister Arun Jaitley said the government will stick to the “glide path” for the fiscal deficit and that the impact of the recapitalisation bonds on the fiscal position will depend on its legal nature and issuing agency. Chief Economic adviser Arvind Subramanian said that under the accounting practice of International Monetary Fund, such recapitalisation is treated below the line, meaning it is not part of the fiscal deficit. He said, “But under our own accounting practices, it is above the line and part of the deficit. The reason it is below the line is because when you recapitalise, you don't directly add to the demand for goods and services, which is what the deficit measures. So in that sense it is not going to be inflationary, et cetera et cetera.”
From the total amount, Rs 1.35 trillion will be received from the sale of so-called recapitalisation bonds. The remaining Rs 76,000 Crore will be through budgetary allocation and fundraising from the markets. The package depicts a visible increase over the current budgetary allocation. Indian banks have a massive stressed asset pile that touches close to Rs 10 trillion, crimping their ability to give fresh loans. Some experts believe, this method of capital infusion is the best option considering the government's current fiscal position, and because not all PSU banks are in a position to tap markets given the asset quality issue.
A treasury official with a Mumbai-based state-owned bank said, “Another way is to allow banks to sell these bonds, where the government will give explicit guarantee on principal and interest service. Alternatively, they can issue recap bonds, on the lines of oil bonds, where it will sell these bonds to banks, who will then down sell such securities.” Chief Economist at IndusInd Bank, Gaurav Kapur said whatever route the government uses to sell these bonds, it will be seen as increasing the debt burden of the government. “This is something which will be seen as cautionary by rating agencies even though there will be limited impact on the fiscal deficit since this is an off-budget item,” he said.
Fitch Ratings said the capital infusion may make the 3.2 per cent fiscal deficit target for 2017-18 difficult to achieve, if two-thirds of the planned recapitalisation bonds are issued by the government. It said the announcement “is a significant change from the drip-feed approach pursued over the last few years and should help address the capital shortages that are a major negative influence on the viability ratings of the banks.” The agency said, “The recapitalisation plans could make this target more difficult to achieve if recapitalisation bonds are to be issued by the central government, which might mean expenditure cuts elsewhere. Recapitalisation bonds would still imply contingent liabilities for the government if they are instead issued by quasi-government institutions. The $21 billion of planned issuance is equivalent to 0.9 per cent of GDP.”
“The latest planned injections will go a long way in plugging the total capital gap. They also exceed the $6-7 billion that we estimated the government would need to pump in on a bare minimum basis (excluding buffers) to address weak provision cover and aid in effective NPA resolution,” Fitch said. “However, the size of capital allocations is to be determined by performance, which suggests the largest share will go to stronger banks, while some banks — particularly smaller, struggling ones- could still be swept up into the government’s consolidation agenda.”
