PSB's NPAs are likely to increase; may pressure government to recapitalize through RBI reserves, bonds: report

MUMBAI: Delinquent loans from state banks are likely to increase by 2-4 percentage points, which will put up to $ 15 billion in recapitalization pressure on the government in fiscal year 21, a foreign brokerage firm said Tuesday. .

The consolidated fiscal deficit target is likely to be exceeded by 2 percentage points due to stimulus spending, lower tax revenues and low divestments, and you will have to find different ways to raise resources for recapitalization, analysts at Bank of America said.

The government can issue a recapitalization, or the huge amount of more than $ 127 from the RBI can also be used to help the state bank's recapitalization needs, he said.

There is near unanimity among analysts that the current COVID-19 pandemic will lead to an increase in the bank's non-performing gross assets, and some reports indicate that shares will also double.

The brokerage said the increase in non-performing assets by 2-4 percentage points will need a government recapitalization requirement of $ 7-15 billion.

He said that wrap bonds are a proven instrument that has helped banks in the past.

The government will infuse capital into PSU banks and finance them by issuing recapitalization bonds for them. PSU banks will invest the capital received in recapitalization bonds, Bank of America said.

Claiming that such a move does not involve moral hazard, he elaborated by saying that PSU banks can heal their broken balance sheets and meet adequate capital requirements through bonds and once growth recovers, the government can gradually convert these recap bonuses in normal G-secs and sell them to the market.

The bond interest cost will impact the Center's fiscal deficit, although that will also be moderated in part by profit transfers from PSU banks that have retreaded bonds, he said.

Recapitalization bonds enter the fiscal deficit in the year of their maturity and this is why the bonds were issued with no fixed maturity in past cases, he added.

In addition to bonds, the $ 127 billion RBI revaluation reserves can also be deployed, he suggested, adding that such a move will be neutral from a fiscal deficit perspective.