Moody's concern for weaker state-run banks

Points to implications of recent govt decision on equity support to only the more efficient ones; queries where else the needed capital can come from

Rating agency Moody’s said on Monday the central government’s decision to infuse equity only in efficient public sector banks (PSBs) would affect the credit profile of weaker lenders such as  Central Bank of India, IDBI Bank and Indian Overseas Bank.

Early this month, the government decided to inject Rs 6,990 crore of capital into nine state-owned banks. This was the first tranche of the Rs 11,200 crore it had earmarked for investment in PSBs during 2014-15.

While announcing this, it changed the criteria for this financial year’s allocation, to using banks’ profitability as a key parameter. This change is credit-negative for state-owned banks that are less profitable, including those named earlier, Moody’s said.

On the other hand, for the same reason, Punjab National Bank, Bank of Baroda, State Bank of India, and Syndicate Bank would be among those which benefit, Moody’s said.

The government is to only consider allocating capital to banks whose average return on assets over the past three years and whose return on equity over the past one year are higher than the corresponding weighted average ratios of state-owned banks overall.

Over the past three years, banks with weaker capital levels received larger capital allocations, regardless of their size or profitability, Moody's noted. Under these new criteria, the weaker state-owned banks, with low capital levels and less ability to generate it, will have to rely on external infusion.

This will be challenging, as even strong state-owned banks have found it difficult to access the equity capital markets.

Thus, capital infusion from the government is the only way for these banks to improve their capital ratios, Moody’s added.

If the government were to scale back capital allocation to less profitable banks, as the new policy suggests it will, this would have significant negative implications for their capital ratios.  

The more profitable state-owned banks might now get a higher amount of capital than they previously expected. However, even after these infusions, the capital levels of these relatively more profitable ones will remain weak, said Moody's.