'Recapitalisation bond issuance could be Rs 35k-40k cr'

Speaking to CNBC-TV18 Ashvin Parekh of Ashvin Parekh Advisory Services said that RBI governor Raghuram Rajan's idea to pump government money into banks is a sound idea. "It is a well-thought-out move," he said. Rajan had said in a meet yesterday that government should sell recapitalisation bonds to banks and pump the money back into the struggling lenders. "The banks will be able to take on more deposits. In their balance sheets, capital and deposits will have to be met with Basel-III guidelines," he said. When banks invest in goverment bonds, the government will plough the money back into the banks in the form of equity, he said, adding that the proposal to stimulate the economy through recapitalising banks is a good move.
He estimates there could be an issuance of Rs 35,000-40,000 crore worth recapitalisation bonds. 

Rajan on Wednesday said that the slowdown in credit growth is not because high interest rates but banks are averse to lend because of mounting bad loans.Below is the verbatim transcript of Ashvin Parekh's interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.Latha: What is your sense, is this a good idea and should we think it will get implemented?A: It is a good idea because if you go through the speech, the first part of the speech talks about growing the credit. He attributes the large part of the non-performing assets (NPAs) to the credit rather than to the interest rates. If one has to accept that proposition then in that case, in order to stimulate credit, in order to make sure that when the borrowers are ready, when they are investing, the banks should be ready to invest. There should have enough liquidity, they should have enough funds on hand and capital on the other side.What may happen with this move is that with the recapitalisation bonds, the banks may be able to take more deposits because at the end of it, in the balance sheet, capital and deposits have clearly a proportion that you must met with under basel III conditions. So with more capital coming in, they may be able to raise more deposits, they may be able to mobilise more deposits and then they may be able to expand the credit. So it is a good move, well thought-about move.As you rightly said, even the rating agencies may give it a pass when they consider the condition -- after all it is like investing SLR, it is a sovereign paper guaranteed by the sovereign. So to that extent, it is in some form a solid investment but on the other hand when the equity comes in in the form of actual cash that is what basel III requires. You have to have common equity to be classified in the calculation of capital adequacy that becomes very critical. So, all in all when the banks invest in these bonds but on the other hand the cash that government picks up is utilised in terms of pumped in back to the banks by way of cash in the form of equity. It is a good move.I would certainly say that in these conditions, if you accept the theory that credit growth is required to stimulate the economy instead of interest rates then I entirely agree with this proposition.Reema: Do you believe then via this bond recapitalisation roof for public sector undertaking (PSU) banks we are going to see a much larger recapitalisation figure and if yes, what would you go with?A: Basically what has happened is we go back to the Reserve Bank of India's (RBI) original assessment of the evaluation of capital requirement in the banking system. So there was at one point in time -- about two to two and a half years ago -- an indication of almost about Rs 5 lakh crore over a period of about five years. So everyone is talking about a large amount of capital. So even if we aid to the Rs 25,000 crore that the government has agreed to pump into the banking system by way of actual fresh capital, even if I take an equal amount or a little larger amount, one could see an issuance of somewhere around Rs 25,000-40,000 crore by way of this recapitalisation bonds.