Govt's capital support for PSBs only enough for regulatory norms: Moody's

Stress remains; broader reforms necessary to sustain improvement

Rating agency Moody's on Tuesday said that the Indian government's plan to infuse extra capital in public sector banks in fiscal 2018-19 will suffice only to meet capital adequacy and improve provisions for bad loans in loss-making banks. However, stress will still persist.

Although the government support will help the public sector banks build up their capital and provisioning buffers against losses. These improvements could only prove to be only temporary in absence of any broader reform to fundamentally strengthen their weak underwriting practices.

Without reform, the government will continue to have to inject capital into the banks when they face stress, which will strain its own finances and hinder its efforts for fiscal consolidation, Moody’s said.

Alka Anbarasu, a Moody's Vice President and Senior Credit Officer, in a statement said the large-scale recapitalization plan was meant to improve capital buffers and loan-loss reserves and also support sufficiently strong loan growth. But it 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.

The capital injections will only be enough to enable to achieve Common Equity Tier 1 (CET1) ratios of at least 8% by March 2019, satisfying the 2.5% conservation buffer on top of the 5.5% minimum under Basel III norms in India. This will give banks a capitalization profile comparable to those of their similarly rated peers globally.

However, to maintain capital buffers at regulatory levels, the banks will have to keep loan growth modest, at 5%-6%. And this means the government has little choice but to increase capital support if it seeks faster loan growth to support economic expansion, she said.

The government currently plans to provide Rs 650 billion of new capital for public sector banks in fiscal 2019 after infusing Rs 900 billion in 2017-18. Of the Rs 650 billion, the government allocated Rs 113 

billion to five banks in July.

Moody's said it considers that the public sector banks'  external capital needs will not grow much further after fiscal 2019 as their profitability will gradually impis innd credit costs moderate. This is  in tandem with progress in ongoing balance-sheet clean-ups.

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