PSB capital infusion plan credit positive but not a game changer: Moody's

The rating agency says Rs 70,000 cr is a relatively small amount and that more needs to be raised from equity markets

Global Ratings agency Moody’s on Thursday said the Indian government’s plan to infuse Rs 70,000 crore equity capital into public sector banks (PSBs) is credit-positive, as it reverses an earlier policy of selective capital infusion.

Still, the amount is relatively small and banks will need to raise additional capital from the equity markets, Moody’s said.

The government is aiming at improving the tier-1 capital ratios for all PSBs to at least 7.5 per cent by March. This marks a key change from the previous policy that specified certain profitability thresholds for banks to receive government capital. In addition, the front-loading of the capital allocation — with Rs 50,000 crore — coming in the first two years — is also credit positive.  The four-year time-span offers medium-term visibility regarding the public sector banks (PSBs)’ capital positions, says Moody’s.

“Though the capital infusion plan is credit positive, we note that the capital amount is a fraction of the overall capital requirements over the next four years,” said Srikanth Vadlamani, vice-president and senior credit officer. “The banks still need access to equity markets to materially improve their capital levels,” he added.  So far, PSBs have been unable to access the equity capital markets. This has been a key negative driver of their overall credit profile.

Moody’s continues to believe that for their capital position to stop being a negative driver of their credit profile, PSBs will have to demonstrate access to equity capital markets.

The systemic support assumptions for PSBs remain unchanged. Even after the government announcement in February 2015 signalling a lower and a selective capital infusion, PSBs’ ratings continued to assume a very high level of systemic support.

This is so because the systemic risk of the government not supporting even a small PSU bank was too high for the government to actually implement a policy of selective capital infusions, Moody’s pointed out.

Hence, a reversal of that policy now would not impact the systemic support assumptions built into PSU banks’ ratings, it added.