Money & Banking

Infuse more capital in public sector banks: Moody’s

Our Bureau Mumbai | Updated on January 20, 2018 Published on February 24, 2016


Otherwise, credit profiles of banks could worsen, says rating agency

The credit profiles of Indian public sector banks will worsen if the Centre does not revise upwards its capital infusion plan for banks in the Union Budget to be presented on February 29, cautioned global credit rating agency Moody’s.

In July 2015, the Centre had come out with a roadmap for recapitalisation of PSBs, whereby it committed to pump in ₹70,000 crore over four financial years, beginning FY16.

There are 22 PSBs in the country and the Centre owns majority stake in them.

Srikanth Vadlamani, Vice-President and Senior Credit Officer, Moody’s, said: “While the reported non-performing loans (NPLs) of the 11 public sector banks that we rate registered a significant 0.9-4.1 per cent increase in the most recent quarter ended December 31, 2015, Moody’s view of the true underlying asset quality of these banks has remain unchanged.”

The increase in NPLs was because of the recognition of stress in a few large accounts, as well as slippages from restructured accounts, he said, and added that both these trends have been factored into Moody’s view on the banks’ asset quality.

Moody’s rates 11 PSBs — State Bank of India, Bank of Baroda, Bank of India, Punjab National Bank, Canara Bank, Union Bank of India, IDBI Bank, Central Bank of India, Indian Overseas Bank, Syndicate Bank and Oriental Bank of Commerce.

The banks’ enhanced NPL recognition in the quarter ended December was spurred by the Reserve Bank of India’s directive to recognise specific accounts as NPLs.

Despite this, some large corporate exposures with weak financial metrics could continue to remain as standard assets on the banks’ books, Moody’s said in a statement.

Capital requirement

In line with its view on the banks’ asset quality, Moody’s estimates that the 11 public sector banks’ external capital requirements remain unchanged at ₹1.45-lakh crore for the four fiscal years (FY16-19).

“The estimate factors in the full extent of the asset quality issues that the banks are facing, and not just the extent of impaired loans that have been recognised so far.

“However, there would be a significant front-ending of capital requirements now,” Moody’s said.

The front-ending of NPL recognition and provisioning results in a corresponding need to boost capital levels, Vadlamani explained.

Consequently, unless the Centre revises upwards its capital infusion plan for the banks in its upcoming Budget, banks will see negative pressure on their credit profiles, he said.

Moody’s, in a recent report, pointed out that PSBs are unlikely to gain access to the capital markets for equity capital in the near term given their low valuations. The banks will, therefore, have to turn to the Centre for accelerated capital injections over the next 18 months. When the Centre unveiled its recapitalisation roadmap for PSBs, it said that excluding internal profit generation, which is going to be available to the banks (based on the estimate of average profit of the last three years), the requirement of extra capital for the next four years up to FY19 is likely to be about ₹1.80-lakh crore.

Moody’s said implicit in the Centre’s plan for the banks was the authorities’ expectations that these banks would be able to tap the capital markets for their remaining funding requirements when the capital-raising environment is more conducive.

However, with heightened capital requirements in the near term, the key assumptions of this roadmap may no longer be valid.

Published on February 24, 2016
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