Indian economy: Bank recapitalization only incrementally positive

Last week was adventurous for India’s equity market. On Wednesday, the day after the banks’ recapitalization plan was introduced, the headline NIFTY index was up less than 1%; however, this masked the massive reallocation that happened in favor of large PSU banks – the pack was up ~30% in one day, with stocks like PNB up by ~50%. While equities cheered, it is important to ponder over whether the recapitalization program – on its own - will lead to any significant improvement in the economic revival. In this note, we argue why the rcap-bond plan will lead to only incremental benefits to the economy.

-- It is broadly argued that bank recapitalization is a magic potion, a cure-all to revive bank credit growth, and thus, the investment cycle. We, however, believe that while recapitalization has been the need of the hour for the past 4-5 years, and the government has rightly addressed the capital requirement of PSU banks, the move is, at best, only incrementally positive for economic recovery and fails to address the key issues – lack of demand for industrial credit and unwillingness of non-PSU banks/other providers of funds to lend to stressed corporate borrowers.

-- Recovery in the investment cycle could still be at least two years away – probably in FY20 or later.

Click here for detailed note.