What does recapitalization means for retail investors

The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.

The government has recently announced a slew of measures to give a further impetus to investments and economic growth. Right from Rs 2.11-lakh-crore recapitalization plan for the public sector banks (PSBs) to announcing an outlay of Rs 6.92 lakh cr. for road construction plan, steps are being taken to revive credit growth, generate employment and instill exuberance in the economy. These policy announcements have been hailed across sectors as positive stimulus to push Indian economy on accelerated growth path. 

As we know, growth of any economy is a direct factor of credit demand and availability. Active borrowers, sufficient liquidity and favorable interest rates lead to credit circulation in the economy which further propels industries, businesses and employment. For a while, Public sector banks in India have been grappling with issues of NPAs and they were compelled to focus on resolving their NPAs than on new lending. Insufficient equity capital on the books prevented them to provide adequately for these NPAs, thereby risking delay in resolution of these NPAs and other stressed assets. This scenario reflected in the slowing credit growth rate. 

A viable solution to address the NPA issue is to provide the banks with adequate capital which would enable them to clean up their balance sheet and offer them both financial muscle and managerial attention to focus on their core business activity of lending.

In a masterstroke, the government has laid down a plan to infuse equity capital in the PSBs using the ‘Recapitalization bonds’, market borrowings and budgetary outlays. This plan will remove the major bottleneck of NPAs thereby enabling banks to focus on their core business of lending. When interest rates were slashed by 200 bps over the period of three years, banks could not entirely pass on the lower rates for borrowers due to capital and liquidity crunch. With recapitalization, lower interest rates can be passed on to corporate and retail borrowers which will give a momentum to economic activities. Projects in infrastructure will give a further boost to credit demand on the wings of increased demand for construction raw material like cement and steel, construction equipment and other input raw material. This will push the rate of economic growth higher. PSB recapitalization and development projects would oil the economic machinery to accelerate its momentum on the growth path. 

While markets are clearly enthused about these developments, retail investors must consider the following factors before investing in such a scenario. 

Invest Wisely

While equities seem to be an attractive investment option with Nifty and BSE Index reaching record highs, a retail investor is advised not to base their investments simply on hearsay or tips from friends and relatives. Conduct a thorough research about the available options to make an informed decision. Ask for help from expert professionals so as to take calculated risk instead of getting carried away by market movements. 

Take Mutual Funds route 

For those who are unsure of how to approach equity as an asset class for investment, mutual funds could be a viable option. The investor can opt for sector specific funds to maximize returns at lower risk. Diversification offered by mutual funds will also serve as a cushion against any unpredictable movement in the markets. 

Be mindful of your portfolio 

Any investment decision should be based solely on the investment goals, and risk capacity of an investor. Retail investors should consider investments in a particular sector only if such decisions strengthen their portfolio and are within their acceptable risk limit.  

Stay Invested 

An eminent investment guru has rightly said, “Time in the market is more important than timing the market”. Temptation to make quick returns by investing in sector specific stocks should be avoided specifically for investors who do not have the technical know-how of the market functions. Do not indulge in speculation based on market movements. Instead, staying investing for a longer term would be the best strategy to tide over any market volatility and to register good returns at the same time. 

Bold reforms undertaken by the government will certainly boost demand and investment as well as strengthen the domestic banking system in the long-term. With economy growth prospects looking bright, it is time for investors to take informed financial decisions to participate in the India growth story. 

Originally published in DNA Money & Zee Business, Aug,18.