The recapitalisation plan for public sector banks (PSBs) will help the lenders but it also poses some fiscal risks for the government, analysts say.
After market hours on Tuesday, Finance Minister Arun Jaitley spelt out an ambitious Rs 2.11-lakh-crore recapitalisation plan for PSBs. Of this, Rs 1.35 lakh crore would be funded through recapitalisation bonds, and the rest would flow in from the government’s budgetary support.
Probably sensing the move, shares of most public sector banks (PSBs) surged on Tuesday. The Nifty PSU Bank index recorded its sharpest single-day gain in 10 months — up 3.8 per cent at 3,093 compared with less than a per cent rise in the Nifty Bank, Nifty Private Bank and the benchmark Nifty50 indices.
Among individual stocks, Andhra Bank, Syndicate Bank and Punjab National Bank (PNB) ended higher by more than five per cent each, while State Bank of India, Bank of Baroda, Bank of India, Central Bank of India, Oriental Bank of Commerce (OBC), IDBI Bank and Union Bank of India were up three-five per cent.
In a recent note, Christopher Wood, managing director and equity strategist at CLSA, had said the absence of an investment cycle and the related lack of loan growth were directly linked to the ongoing asset quality problem in the banking system, a major unfinished business of the government.
Analysts say the latest move will benefit capital-starved PSBs, which will be able to focus on business growth once their basic need of capital is taken care of. “This is a positive step, especially for PSU banks that saw their capital base shrink, given the large non-performing assets (NPAs). Once their capital base is taken care of, PSU banks can focus on business growth,” said G Chokkalingam, founder & managing director, Equinomics Research. But, there are some concerns as well.
The government’s fundraising plan, analysts say, will ensure a tightrope walk for the Narendra Modi government as it has to keep a balance between expenditure and maintaining the fiscal deficit at manageable levels, given the budgetary allocation of nearly Rs 76,000 crore.
Mobilising money via bonds will not be a problem, they say, as government-backed issues have been absorbed by the markets on earlier occasions as well. It should be no different now.
“The government may have to compromise a bit on the fiscal deficit front, given the budgetary support allocation. However, soft oil prices are still a saving grace for the economy and can lend the required support to the overall fiscal situation. Another benefit of this entire exercise will be that the government will get more aggressive on divestment and PSU dividends to meet any shortfall in the fiscal deficit,” Chokkalingam said.
Ambareesh Baliga, an independent market analyst, however, had a cautious view.
“Though the bonds will not be a part of the fiscal deficit, the budgetary support is higher than expectation. One needs to ascertain where this budgetary support money (Rs 76,000 crore) will come from. Earlier, the government had planned for about Rs 25,000 crore, in the Budget. That said, the overall measure will be a positive for PSU banks. Bonds should be absorbed well by the market,” he said.