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Recapitalisation of PSBs need follow up with structural changes: UBS

The government on October 24 unveiled a Rs 2.11-lakh crore two-year road map to strengthen NPA-hit public sector banks, which includes re-capitalisation bonds, budgetary support, and equity dilution

Press Trust of India  |  New Delhi 

Illustration: Ajay Mohanty
Illustration: Ajay Mohanty

The programme for public sector is likely to boost sentiment as it fuels growth recovery hopes, but should be followed up with structural changes at such for better results, says an UBS report.

According to the global financial services major, though the amount may create a supportive environment for growth, it may not drive growth by itself.


The on October 24 unveiled a Rs 2.11-lakh crore two-year road map to strengthen NPA-hit public sector banks, which includes re-capitalisation bonds, budgetary support, and equity dilution.

"We think this infusion can ease Ind AS adoption for state-owned-enterprise (SOE) and accelerate non- performing loan (NPL) clean-up," UBS said in the research note.

The report however noted that "this one-time bailout would be wasted if it is not followed up with structural changes at SOE (in terms of HR practices, incentive structures and independent boards)".

PSU bank however may lead to better long-term growth prospects.

"While bank will be neutral for in the short term, we think it may meaningfully improve productivity dynamics and lay the foundation for stronger medium-term growth," the UBS report said.

The infusion in PSBs entails mobilisation of capital, with maximum allocation in the current year, to the tune of about Rs 2,11,000 crore over the next two years, through budgetary provisions of Rs 18,139 crore, and to the tune of Rs 1.35 lakh crore.

UBS further noted that though the fiscal impact of the bank programme may be limited, debt-to-GDP could increase around 120 bps if the does the issuance.

"Considering that the higher fiscal deficit would not add to demand-side pressure, we expect a negligible short-term impact on CPI inflation," the report said.

First Published: Thu, October 26 2017. 13:47 IST
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