The government’s recapitalisation plan for the 21 public sector banks (PSBs) will not be sufficient to support credit growth but will take care of the provisioning requirement for bad loans, according to Moody’s.
“The PSBs’ capital shortfalls are larger than the scale that the government had expected when it announced the recapitalisation in October 2017, mainly because the banks have failed to raise additional capital from the market and it may be difficult for them to raise more capital given the substantial decline in their share prices since the beginning of 2018,” says Alka Anbarasu, vice-president and senior credit officer at Moody’s. In October last, the Centre had announced the infusion of ₹2.11 lakh crore in PSBs over two years, of which ₹1.35 lakh crore was to come through recapitalisation bonds. The government will infuse ₹65,000 crore in this financial year, following the ₹90,000 crore infusion made in FY18.
“Moreover, the capacity of these 21 banks to generate internal capital has deteriorated because of their weak financial performance and a sharp increase in government bond yields, which hurt their investment income,” said Ms. Anbarasu.
In addition, the discovery of the ₹14,400 crore fraud in Punjab National Bank in February this year increased the need for additional capital for the lender.
‘Modest growth’
Moody’s said all PSBs will see their Common Equity Tier 1 (CET1) ratios exceeding the 8% minimum by March 2019, following the capital infusion, though this assumes overall credit growth for the PSBs of a modest 6%-8% in the next year. The relatively stronger banks will have room to grow, but the weaker ones will continue to shrink their balance sheets to conserve capital, she said.
Moody’s Indian affiliate ICRA said that with the accelerated recognition of stressed assets during FY18, the asset quality problems of the banking sector had peaked in March 2018.
ICRA said further additions to gross non-performing assets will decline with fresh slippages falling to about 3% in FY19 compared with 7.1% in FY18 and 5.5% in FY2017. “The regulatory push for the recognition and resolution of stressed assets stepped up further during Q4FY2018 as the RBI announced the revised framework for the resolution of stressed assets during February 2018,” said Karthik Srinivasan, senior VP, group head — Financial Sector Ratings, ICRA.
