State-owned bank NPAs may rise in FY21, govt's fiscal deficit to widen: Bank of America

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 overrun by 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 for recapitalisation, analysts at Bank of America said.

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

 

There is a near-unanimity among analysts that the ongoing COVID-19 pandemic will lead to an increase in bank's gross non-performing assets with some reports pegging the stock to double as well.

The brokerage said the increase in non-performing assets by 2-4 per cent of the assets will need a government recapitalisation requirement by USD 7-15 billion.

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

"The government will infuse capital into PSU banks and fund it by issuing recapitalisation bonds to them. PSU banks will invest the capital 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 broken balance sheets and meet adequate capital requirements through the bonds and once growth recovers, the government can gradually convert these recap bonds into normal g-secs and sell them to the market.

The interest cost on the bonds will impact the Center's fiscal deficit, although that will also be partly moderated by profit transfers from PSU banks holding recap bonds, it said.

Recapitalisation bonds enter the fiscal deficit in the year of their maturity and it is because of this that the bonds were issued without any fixed maturity in the past instances, it said.

Apart from the bonds, the RBI's revaluation reserves of USD 127 billion can also be deployed, it suggested adding that such a move will be neutral from a fiscal deficit front perspective.