FinMin should be able to infuse $27 bn into PSBs by 2019: BofAML

The report said NPL flow can be arrested only by cutting lending rates to spur recovery

The Ministry of Finance should be able to infuse $27 billion of capital into PSU banks by 2019 without breaching its fiscal deficit target, says a Bank of America Merrill Lynch (BofAML) report.

According to the global financial services major, PSU bank capital risks are overdone and government is fully incentivised to address their asset quality to support recovery.

"We estimate that the MoF should be able to infuse $27 billion of capital into PSU banks by 2019 without breaching its fiscal deficit target of 3.5 per cent of GDP," BofAML said in a research note.

The report said the NPL (non-performing loan) flow can be arrested only by cutting lending rates to spur recovery.

"We continue to expect the RBI to OMO Rs 1,200 billion in the second half of this fiscal to pull down lending rates by as much as 50-75 bps," it added.

OMOs are market operations conducted by RBI by way of sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.

If there is excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity. Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market.

"...The real source of rising bank NPLs are high lending rates when we are living through a global recession that may be longer than the Great Depression," it said.

Banks have already cut MCLR by 50 bps after PM Modi's December 31 speech. BofAML expects base rate cuts by major banks like SBI and HDFC Bank.

Last week, the government empowered the RBI to direct banks to initiate insolvency proceedings to recover bad loans.

Finance Minister Arun Jaitley had said the ordinance (to amend the Banking Act) gives the Reserve Bank powers to issue "directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016".

The government has notified the Banking Regulations Amendment Ordinance last week.