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While the contours of the recap plan are being worked out, the Street is in a mood to party, lifting all PSU bank stocks irrespective of quality.

Madhuchanda Dey

Moneycontrol Research

The last salvo has been fired, even if it is a few days too late for Diwali. After working with a piecemeal approach, the government has finally announced a mega recapitalisation package for banks. While the contours are being worked out, the Street is in a mood to party, lifting all PSU bank stocks irrespective of quality. Will the celebrations go on, or is it still necessary to winnow out the weak ones as part of your investment strategy?

The recapitalisation

The government has announced Rs 2.1 lakh crore capital infusion for state-owned banks – Rs 1.35 lakh crore from bonds, Rs 18,000 crore from budgetary support and the remaining Rs 58,000 crore through share sales.

Why a recapitalisation bond now?

Most Indian banks are sitting on a mountain of liquidity thanks to the demonetization exercise and lack of appetite for credit in the system. This has resulted in banks ending up investing most of this liquidity in government securities, driving the Statutory Liquidity Ratio (SLR) bond holdings of banks above the minimum requirement by up to 700 basis points. This combination of a surfeit of liquidity and weak credit demand has created a perfect backdrop to design a recapitalisation bond to address the capital problem.

Content courtesy by www.moneycontrol.com