MOSL: ECOSCOPE-Bank recapitalization only incrementally positive for the economy-Investment revival could still be at least two years away

​ECOSCOPE: Bank recapitalization only incrementally positive for the economy; Investment revival could still be at least two years away

• 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%.
  
• 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.