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'Bank recapitalisation to improve credit, GDP growth'

Thursday, October 26, 2017

The government's decision to infuse Rs 2.1 trillion of capital in public sector banks (PSBs) could improve the credit growth by up to 10 percentage point and also boost the GDP growth by up to 5 percentage point, said a report.

The government yesterday announced a capital infusion of Rs 2.11 lakh crore in state-run banks over a period of two years, which includes recapitalisation bonds, budgetary support and equity dilution.

It said that Rs 1.35 trillion will be financed by recapitalisation bonds, with the remaining Rs 0.76 trillion will be coming from the budget and raising funds from markets by reducing government equity.

According to the Goldman Sachs Research Report, every incremental Rs 100 billion of bank capital infusion by the government has the potential to increase credit and GDP growth by 1 percentage point (pp) and 0.5 percentage point (pp).

"By the same calculations, a Rs 1.05 trillion infusion into PSU banks over the next 12 months (half of the Rs 2.1 trillion announced) would lower the drag on bank credit growth by up to 10 pp and boost GDP growth by up to 5pp, assuming the banking system leverage ratio remains constant as it has over the past 8 years," the report said.

Even with some slippage in the leverage ratio, though, the bank recap will generate a powerful credit impulse, likely imparting a substantial boost to investment and activity growth over the coming year and creating upside risk to our current GDP growth forecasts for the coming years, it said.

Given the sheer magnitude of this recap package and the significant implied easing in credit conditions, as credit and investment growth rebound, the report expects a re-rating of growth expectations in the country in the coming quarters.

Bank recapitalisation critical for economic recovery: BofAML
Bank recapitalisation is "critical" for the economic recovery of the country as it will step up lending which in turn will aid growth numbers, says a report.
According to a research report by Bank of America Merrill Lynch (BofAML), "bank recapitalisation is a sin qua non (an essential condition) for recovery.... It will step up lending, and, therefore, growth, step up tax collections and partly bring down the fiscal deficit".

"This (capital infusion in PSBs) will pull down lending rates, spur aggregate demand, put idle factories to work, exhaust capacity and spark investment in 2-3 years," the report said.

PSU bank recap plan credit positive: Moody's
Moody's Investors Service yesterday said the government's plan to infuse Rs 2.11 lakh crore in PSU banks is "significant credit positive" as it will help address the problem of weak capitalisation. To strengthen capital position of banks for onward lending to private sector, the government yesterday announced that an 'unprecedented' Rs 2.11 lakh crore would be infused in PSBs over two years.

"The quantum of the plan is large enough to comprehensively address these banks' weak capitalisation levels and is a significant credit positive as weak capitalisation is the main credit weakness for most rated public sector banks," said Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.

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