Moody's: Indian government's capital infusion plan credit positive for state-owned banks, but not a game changer

Moody's Investors Service says that the Indian government's (Baa3 positive) plans to infuse INR700 billion into Indian state-owned banks (PSU banks) through 2020 are credit positive for those banks, as it reverses an earlier policy of selective capital infusion. Still, the amount is relatively small and banks will still need to raise additional capital from the equity markets.

The Indian government is aiming to improve the Tier 1 capital ratios for all PSU banks to at least 7.5% 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 INR500 of the total INR700 coming in the first two years -- is also credit positive, while the four-year timespan offers medium-term visibility regarding the PSU banks' capital positions, says Moody's.

"Although 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," says Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.

"The banks still need access to the equity markets to materially improve their capital levels," adds Vadlamani.

So far, PSU banks have been unable to access the equity capital markets, and 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, PSU banks will have to demonstrate access to equity capital markets.

Moody's systemic support assumptions for PSU banks remain unchanged. Even after the government announcement in February signaling a lower and a selective capital infusion, PSU banks' ratings continued to assume a very high level of systemic support 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. Hence, a reversal of that policy now would not impact the systemic support assumptions built into PSU banks' ratings.

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