Capital support of Rs.2.11trn from recap bonds/fund raising

The Finance Ministry unveiled a package of measures, to raise infrastructure spending, particularly road, highways, support small and medium businesses and helping the banking sector, noted Singapore banking group DBS in its report on 25 Oct 2017.

A key announcement in this midst was a recapitalisation plan for public sector banks weighed by rising bad loans, which in turn has crimped loan growth, observed DBS.

Capital support to the tune of Rs.2.11 trillion (US$32 billion) has been promised, over the next two years. Of this, Rs.1.35 trillion will come from recap bonds and Rs.760 billion through budgetary means/banks’ fund-raising efforts.

This is in addition to the existing recap plan referred to as Indra-dhanush, under which a pending sum of Rs.100 billion (0.06% of GDP) is budgeted each for FY18 and FY19.

This support is timely as banks face mounting non-performing loans, up sharply from Rs.2.75 trillion in March 2015 to Rs.7.3 trillion by June 2017 (over 9% of total loans). Including restructured advances, the ratio is even higher at 12%. Power, iron & steel, telecom etc make up a major chunk of such loans.

Notably, banks are expected to feel more heat from the Reserve Bank of India’s ongoing annual risk-based supervision, which might require more accounts to be reclassified under the stressed category, especially consortium loans.

Operational details on the recap bonds will be available over the next couple of months. To recall, such bonds were tapped in the 1990s under which the banks sold their shares through a rights issue to the government, in return for such capital support.

Such recap bonds have also been used globally, including by a handful of Asian economies during the financial crisis in the late 1990s to stabilise their domestic banking sectors.

Returning to India, the 24 Oct 2017’s measures are encouraging but certain aspects require clarity.

Details on the exact nature of the recap bonds, duration, size, issuance details and interest rates pegged to the instrument.

Bank reforms have also been promised, but details have been scant.

For now, odds of consolidation and M&A in the banking sector are low.

Impact on this year’s fiscal math is under question.

The Finance Ministry suggested that of the Rs.760 billion, Rs.180 billion has already been accounted for in FY18 and FY19 (i.e. Rs.100 billion each in FY18 and next year, minus Rs.20 billion that has already been disbursed this year). Interest paid on the recap bonds might also push up the centre’s revenue expenditure.

But it is also possible that the issuance is structured such that the headline fiscal deficit is left unchanged but will raise government debt levels, believes DBS.

At the same time, a bigger push is likely towards banks’ fund-raising efforts, although its success rests on investors’ appetite, volatility in the markets and health of the issuing institution. In all, the moves were encouraging but details are keenly awaited, said the bank.

Apart from the recapitalisation plans, an investment package worth Rs.6.9 trillion has been set aside for roads construction, with private sector participation.

Other measures included support for the Micro, Small and Medium Enterprises and focus on employment generation. fii-news.com