‘NPAs may rise in FY21, Govt’s fiscal deficit to widen’

Non-performing loans of state-owned banks are expected to rise by 2-4 percentage points resulting in an up to USD 15 billion of recapitalisation burden on the government in 2020-21, a foreign brokerage said on Tuesday.

The consolidated fiscal deficit target is likely to overrunby 2 percentage points due to stimulus spends, lower tax receipts and dip in divestments,and will have to look for various ways of raising the resources forrecapitalisation, analysts at Bank of America said.

   

The government can issue recapitalisation bonds, or theReserve Bank of India’s (RBI) huge reserves of over USD 127 billion can also bedipped into to help the state-run banks’ recapitalisation needs, it said.

There is a near-unanimity among analysts that the ongoingCOVID-19 pandemic will lead to an increase in bank’s gross non-performingassets with some reports pegging the stock to double as well.

The brokerage said the increase in non-performing assets by2-4 percentage points of the assets will need a government recapitalisationrequirement by USD 7-15 billion.

It said the recap bonds is a tried and tested instrumentwhich has helped the banks in the past.

“The government will infuse capital into PSU banks andfund it by issuing recapitalisation bonds to them. PSU banks will invest thecapital received in recapitalisation bonds,” it said.

Asserting that such a move does not entail a moral hazard,it elaborated saying that public sector banks (PSBs) can heal their brokenbalance sheets and meet adequate capital requirements through the bonds andonce growth recovers, the government can gradually convert these recap bonds intonormal g-secs and sell them to the market.

The interest cost on the bonds will impact the Center’sfiscal deficit, although that will also be partly moderated by profit transfersfrom PSU banks holding recap bonds, it said.

Recapitalisation bonds enter the fiscal deficit in the yearof their maturity and it is because of this that the bonds were issued withoutany fixed maturity in the past instances, it said.Apart from the bonds, the RBI’s revaluationreserves of USD 127 billion can also be deployed, it suggested adding that sucha move will be neutral from a fiscal deficit front perspective.

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