PSU banks recapitalisation could ease rating pressure: Moody's

Global rating agency Moody's today said the government's announcement to recapitalise the public-sector banks (PSBs) "could alleviate rating pressure" on these lenders.     

"President Pratibha Devisingh Patil said last Thursday that her government will recapitalise the public-sector banks (PSBs)...We would consider such an event a positive credit development that could alleviate rating pressure on banks," it said in a report.     

Moody's further said that during the current difficult market conditions, bank’s equity buffer could be an important rating driver, as strongly capitalised banks can sustain possible loan losses stemming from an adverse credit cycle.     

Moody's added that the evidence in the market suggests a significant slowdown in both domestic demand for goods as well as a sharp decline in exports, which will challenge the cash flows and loan repayment ability of Indian corporates.     

"We also have observed that PSBs are now much more cautious in their assessment of the credit quality of new loan proposals and that the majority of new loans are geared towards meeting their clients’ core working capital needs as opposed to funding new, riskier projects," the report said.

It said that nonetheless, asset quality at PSBs is bound to deteriorate over the short-to-medium term, while the level of restructured loans is also expected to increase significantly, therefore elevating their credit risk profile.     

The report further said that PSBs are required by law to have at least 51 per cent government shareholding.     

"As the Indian government has gradually diluted its stake in these institutions in the last few years through public offerings, many PSBs are close to their government stake threshold, with limited leeway to raise fresh equity through the capital markets," it added.