Bank Recap to boost credit, improve GDP: Report

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Centre’s bold decision to allow Rs 2.11 lakh crore for recapitalisation of Public Sector Banks (PSBs) can improve the credit growth by 10 per cent point and can also inflate the Gross Development Product (GDP) by five per cent, according to a report.

In a bid to ensure assistance to the Public Sector Banks against the rising Non-Performing Assets (NPAs), Centre has approved a repcapitalisation plan worth Rs 2.11 lakh crore over a period of two years. Calling the latest plan as a “bold” step, the Union Finance Minister Arun Jaitley has said that this is one among the major steps taken to bring reform in the present ailing banking industry.

Reportedly, out of the entire sanctioned amount Rs 1.35 lakh crore would be generated from recapitalisation bond.
Recap Bonds are used by the government to pay for the shares, in a bid to raise the capitals of ailing banks.
According to the sources, in the 90s the government had issued recap bonds to lend money from the banks without permitting the fiscal deficit to expand. But now the recap bonds will not get converted into securities for the government.

“By the same calculations, a Rs 1.05 trillion infusion into PSU banks over the next 12 months (half of the Rs 2.1 trillion announced) would lower the drag on bank credit growth by up to 10 pp and boost GDP growth by up to 5pp, assuming the banking system leverage ratio remains constant as it has over the past 8 years,” said the Goldman Sachs Research Report.
“This will likely be bullish for equities and the rupee in the medium term,” it said.
“The near-term are projecting towards a declining fiscal position, medium-term fiscal fundamentals could actually improve, should private sector growth and private corporate investment spending rebound meaningfully following the easing of credit conditions,” said the report.