Jalan panel report today: This is what D-Street is gearing up for

NEW DELHI: The Bimal Jalan Committee, constituted to suggest appropriate reserves that RBI should maintain and dividends it should pay to the government, is scheduled to submit its report on Monday.

Different brokerages suggest the committee could flag excess reserves at RBI, widely to the tune of Rs 1,00,000-5,00,000 crore, which could be transferred to the Centre to be used to recapitalise ailing state-run banks, such as PNB, IOB and UCO Bank. They do not see any risk to India’s sovereign rating. If anything, such a report ahead of the July 5 Budget should boost market sentiment, they said.

Foreign brokerage UBS says any booster should help the government retire public debt and recapitalise PSU banks and position them well to drive the credit cycle. “A staggered dividend of $10 billion a year, rather than a one-shot $30 billion, is our base case,” the brokerage said last Wednesday.

Global investment bank BofA-ML argued that high non-performing loans do not really need higher RBI contingency reserves.

The Jalan Committee’s decision should go down well with the markets and the rating agencies, said VK Sharma, Head-PCG & Capital Market Strategy at HDFC Securities.

“Let’s be clear: India’s sovereign rating is a function of overall forex reserves that India holds and the outstanding debt, and is not a function of whether RBI gives or does not give any capital back to the government. There is no way it can deteriorate. If RBI was to transfer even up to Rs 3 lakh crore to the government, its own AAA rating won’t change. In fact, this transfer will help India’s rating in the short and long run,” Sharma said.

JM Financial said if things go as per expectations, the government would achieve the dual objective of maintaining low fiscal deficit and pump-priming the economy.

Contingency fund, currency and gold revaluation account add up to Rs 9,2 lakh crore, which is 25 per cent of RBI’s total balance sheet size. If this is brought down by 25 per cent, to the global norm of 14 per cent, it would release capital up to Rs 5 lakh crore (2.4 per cent of GDP), said JM Financial. The brokerage said it would await clarity over the transfer as well as transfer mechanism.

Out of 11 banks put under PCA framework last year, BoI, Bank of Maharashtra and OBC have moved out of the framework while two others, Dena and Vijaya Bank, have been merged with Bank of Baroda.

Banks such as Allahabad Bank, United Bank of India, Corporation Bank, UCO Bank, Central Bank of India and Indian Overseas Bank are still under the PCA framework, in need of urgent capital infusion.

“The government can use excess reserves to recapitalise the capital-starved PSU banks, which can help them start lending and reoil the rusted flywheel of the economy. Stuck loans can come back only after the economic cycle picks up,” Sharma said.

He said PNB, IOB, UCO Bank, Central Bank and Punjab & Sindh Bank could be key beneficiary of such recapitalisation.

ET reported in May that PNB could take control of two-to-three smaller state-run banksm which could include Oriental Bank Of Commerce, Andhra Bank and Allahabad Bank. “Our current loan growth projections of 15 per cent in FY20 presume a staggered recap of SOE banks ($10bn per annum). A one-shot recap would lead to upside to our loan growth being higher by 5-7 per cent and earnings estimates for banks being higher by 10-15 per cent. As per our calculations, a ~US$10bn capitalisation of the financial system can potentially boost credit by up to $100 bn,” UBS said in a recent note.

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