The bank recapitalisation plan of the Indian government will resolve the regulatory capital needs but it may not be sufficient enough to support credit growth, according to Moody’s Investors Service.
Moody’s Indian affiliate, ICRA, said that with the accelerated recognition of stressed assets during FY2018, the asset quality problems of the banking sector peaked in March 2018.
The capital shortfalls are larger because banks have failed to raise additional capital, with many of them having suffered substantial decline in share prices.
The government had planned to infuse ₹65,000 crore into public sector banks this fiscal after infusing ₹90,000 crore last fiscal. In its analysis, Moody’s said that while this infusion will help all PSBs meet the common equity Tier I ratio of 8 per cent, it assumes that credit growth for the system will be only around 6-8 per cent. Besides this, infusion will also support a provision coverage ratio of about 62 per cent, an improvement over the 49 per cent last year, but still the adequacy of the provisioning would depend on the write-downs that banks will need to take for bad debt resolution.
Write-downs
Moody’s expects write-downs in power and construction sector to be much larger than that in the steel sector so far. The government, while unveiling its capital support plan in October, had anticipated banks would raise ₹58,000 crore from the equity market. They have raised only ₹10,000 crore so far.
The share prices of the PSBs have declined by 19 per cent since the beginning of the year, compared to a 3 per cent increase in the Bombay stock market index, Moody’s noted.
According to Moody’s, a key negative credit implication of these developments is that the capital allocations for relatively better-run PSBs – State Bank of India, Bank of Baroda, Canara Bank and Syndicate Bank – will decrease while the capital needs of other banks have increased.
ICRA expects further additions to gross non-performing assets (GNPAs) to decline with fresh slippages falling to around 3 per cent during FY2019, compared to 7.1 per cent during FY2018 and 5.5 per cent during FY2017.