Moody’s Investor Service, on Tuesday, said that the government plan to provide capital support to state-owned banks will improve their capital position but the stress will continue.

“The large-scale recapitalisation plan, which was meant to improve capital buffers and loan-loss reserves and also support sufficiently strong loan growth, will now be just enough to shore up capital ratios above regulatory requirements because the banks’ capital shortfalls have grown larger than the government’s initial projection,” said Alka Anbarasu, Moody’s Vice-President and Senior Credit Officer.

The Centre plans to provide ₹65,000 crore to public sector banks this fiscal, of which it has already allocated ₹11,300 crore to five lenders in July.

This capital infusion comes after the capital support of ₹90,000 crore last fiscal.

Further reforms

The report has warned that without further reforms, the government may have to continue to inject capital into the banks when they face stress. “This, in turn, will strain its own finances and hinder its efforts for fiscal consolidation,” said the report, calling for broader reforms to fundamentally strengthen the weak underwriting practices at state-owned banks. The Moody’s report said the capital injection would only help the lenders achieve Tier I capital ratio of 8 per cent by March 2019, which would meet the 2.5 per cent conservation buffer on top of the 5.5 per cent minimum under Basel III norms in India.

“This would give the banks a capitalisation profile comparable to those of their similarly-rated peers globally,” said Anbarasu.

NPL write-downs

Moreover, while the capital injections will enable the banks to strengthen their provision coverage, it may still not be sufficient if they take large write-downs on the non-performing loans (NPLs) they sell as part of the new resolution proceedings. An increase in provisions could raise their capital needs significantly.

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