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The Union Budget is a credit-negative for public sector banks (PSBs), as the capital infusion announced by the government will be insufficient for lenders in a rising NPAs (non-performing assets) scenario, global rating agency Moody's said on Tuesday.
The government has stuck to the capital infusion road map announced last year, budgeting only Rs 25,000 crore for PSBs in the 2016-17.
According to data from Capitaline, gross NPAs of 39 listed banks surged to Rs 4.38 lakh crore in the December quarter, from Rs 3.4 lakh crore in the previous quarter.
Most of these are contributed by state-run banks.
The only silver lining in the Budget was that the government was open to infuse more capital as and when needed.
It further said increasing recognition and provisioning for NPAs will require a corresponding front-ending of capital requirements.
According to the agency, PSBs will complete NPAs recognition by the end of the financial year 2016-17 (i.e., they will classify all existing weak large corporate accounts, as well as restructured accounts, as NPAs) and have a loan-loss coverage of 70 per cent on this enlarged book. “Under such a scenario, they would report losses of around Rs 74,900 crore over this period. With this in mind, capital constraints will remain a key credit weakness for the public sector banks,” the report said.
Leaving aside capital allocation, there are some measures in the Budget that are likely to be mildly credit positive for the banking sector upon implementation.
A road map for the consolidation of PSBs will be outlined during the year.
“Such a move would be a structural positive, as it would reduce the number of banks from the currently unwieldy 21 and potentially enhance operational efficiency in the sector,” it added.
It further said the plan to improve operating conditions for asset reconstruction companies (ARCs) will help attract more investors to the asset class, which would expedite the resolution of bad assets and support asset quality in the banking sector.
Investors in ARCs will be allowed to hold up to 100 per cent exposure and there will be a complete pass-through of income tax to securitisation trusts, including ARC trusts.
The Budget also outlined plans to strengthen debt recovery tribunals such as through computerised processing of court cases, the report added.