Govt needs to hike equity infusion into PSBs: Moody's

External capital requirements for 11 PSBs remain unchanged at Rs 1.45 trn for FY2016-FY2019

Global rating agency Moody's today said credit profiles of Indian public sector banks will worsen, if government fails to cough up more equity capital for them in the Budget 2016-17. The non-performing loans of 11 PSBs it rates registered a significant 0.9-4.1% increase in the quarter ended 31 December 2015.

Moody's said its view of the true underlying asset quality of these banks has remained unchanged. The overall capital requirements also remain unchanged. Only change is that more capital will have to be infused early than envisaged before.

The increase in non-performing loans (NPLs) was due to the recognition of stress in a few large accounts and slippages from restructured accounts. RBI had asked banks to recognise and provide for weak assets on accelerated basis.

Both of these trends have been factored in into Moody's view on the banks' asset quality.

Moody's said the 11 public sector banks' external capital requirements remain unchanged, at Rs 1.45 trillion for the four fiscal years (FY2016-FY2019).

Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer said the estimate factors in the full extent of the asset quality issues that the banks are facing. However, there would be a significant front ending of capital requirements now.

"The front-ending of NPL recognition and provisioning results in a corresponding need to boost capital levels," adds Vadlamani.

"Consequently, unless the government revises upwards its capital infusion plan for the banks in its upcoming Budget, the banks will see negative pressure on their credit profiles."

The public sector banks are unlikely to gain access to the capital markets for equity capital in the near term given their low valuations. The banks will therefore have to turn to the government for accelerated capital injections over the next 18 months.

The government announced a four-year capital infusion roadmap for public sector banks. It proposed to inject Rs 700 billion during FY2016-FY2019, of which, Rs 500 billion would be injected in the first two years.

At the same time, the capital infusion roadmap indicated that the overall capital requirements of the banks over the four-year period would total INR1.85 trillion.

Implicit in the government's plan for the banks was the authorities' expectations that these banks would be able to tap into the capital markets for their remaining capital requirements, although at a later date, when the capital raising environment is more conducive.

However, with heightened capital requirements in the near term, the key assumptions of this roadmap may no longer be valid.