Bank recapitalisation to boost credit by 10%, spur GDP growth by 5%, say analysts

The capital infusion announced by the government on Tuesday for public sector banks could lower the drag on bank credit growth by up to 10 percentage points and boost GDP growth by up to 5 percentage points, Goldman Sachs said in a report Wednesday.

"We expect the bank recap to be supportive for the rupee in the medium term. The announcement is likely bearish for short-term rates although the impact on long-term rates is more uncertain," the firm said in a media release.

To revive the credit and investment growth outlook, the government announced a bank recapitalisation plan of Rs 2.1 lakh crore (which is 1.3per cent of GDP) to be infused over the next two years into public sector banks. The Indian banking system has been grappling with the issue of non-performing assets and increasing credit costs over the past few years. Goldman Sachs had estimated that the banking system may face additional credit costs of Rs 1.6 lakh crore over the next 12 months. The government has said that Rs 1.35 lakh crore will be financed by recapitalisation bonds, with the remaining Rs 0.76 lakh crore coming from the budget and raising funds from markets by reducing government equity.

Banking sector recap is aimed at significantly reducing the drag from PSU banks on credit growth, loosening economy-wide credit conditions and boosting investment and GDP growth.

Meanwhile, Crisil Ratings has said that the recapitalisation move sends a strong signal of support to public sector banks from the government. "The package will help public sector banks to accelerate provisioning for stressed assets, speed up the NPA resolution process and support the clean up of balance sheets," says Krishnan Sitaraman, senior director with Crisil Ratings. "This will, in turn, help them focus on reviving credit growth." These banks needed Rs 1.4 to Rs 1.7 lakh crore additional capital to meet Basel III requirements by March 2019,  so the package is adequate,  he adds.

In a statement, the Confederation of Indian Industry (CII)  said that a three-pronged strategy to encourage investments was evident in the announcement of expanding public expenditure on infrastructure, boosting private investments and addressing delayed payments to the MSME sector. "The government's decision to enhance spending on roads and highways in a strategic manner including port connectivity and border and cross-border roads will have a big multiplier impact on economic growth," CII said in a statement.

Karthik Srinivasan, Group Head - Financial Sector Ratings, ICRA Limited, a ratings agency, said that the recap plan will address both the issues of growth capital and capital required to absorb losses arising out of elevated provisioning requirement on NPAs. "Most likely the recapitalisation bonds are likely to be subscribed by the banks, whereby their investments, net worth and hence capitalisation will increase to the extent of recapitalisation bonds received by them," he added.