Easing of Basel III norms credit negative for PSBs, says Moody's

According to Moody's, the track record of such dispensations on asset classification, when seen over the last few years in India, has been unsuccessful in addressing the underlying stress

Global rating agency Moody's on Tuesday said Reserve Bank of India's decision to extend the deadline for Capital Conservation Buffers by one year to March 2020 is credit negative for the public sector banks (PSBs).

It expressed reservations on any benefit coming out from the proposed debt restructuring scheme for stressed MSME loans.

"It was the expectation that all public sector banks would have a core equity tier 1 (CET1) ratio of at least 8% by the end of March 2019. This was based on the government's commitment to capitalize these banks to a level sufficient to meet the minimum regulatory capital norms.", Moody's said in a statement.

With the regulatory timelines now extended, it may be a case that at least some of the rated PSBs Common Equity Tier 1 ( CET1) ratios over the next 12 months would be lower than what is currently expected.

Furthermore, the RBI's Central Board has advised regulator that it should consider a scheme for the restructuring of the stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250 million. This is subject to such conditions as are necessary for ensuring financial stability, Moody's said.

While more details are awaited, this approach has the potential for negative implications for the credit profiles of Indian banks.

Moody's said the track record of such dispensations on asset classification, when seen over the last few years in India, has shown that they have largely been unsuccessful in addressing the underlying stress.

On the contrary, keeping stressed loans in the standard category has led to an underestimation of the extent of underlying asset quality issues by bank management, and consequently the severity of the actions that they need to take to address the issue, it added.