According to the global financial services major, PSU bank capital risks are overdone and government is fully incentivised to address their asset quality to support recovery.
"We estimate that the MoF should be able to infuse $27 billion of capital into PSU banks by 2019 without breaching its fiscal deficit target of 3.5 per cent of GDP," BofAML said in a research note.
The report said the NPL (non-performing loan) flow can be arrested only by cutting lending rates to spur recovery.
"We continue to expect the RBI to OMO Rs 1,200 billion in the second half of this fiscal to pull down lending rates by as much as 50-75 bps."
Banks have already cut MCLR by 50 bps after PM Modi's December 31 speech. BofAML expects base rate cuts by major banks like SBI and HDFC Bank.
Last week, the government empowered the RBI to direct banks to initiate insolvency proceedings to recover bad loans.
Finance Minister Arun Jaitley had said the ordinance (to amend the Banking Act) gives the Reserve Bank powers to issue "directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016".
The government has notified the Banking Regulations Amendment Ordinance last week.
