Moody's: Scale of capital infusions for India's public sector banks is credit positive

Moody's Investors Service says that the India government's detailing of how much capital each public sector bank will receive in the financial year ending March 2018 is credit positive for the sector.

"This announcement is a credit positive for all public sector banks, and especially the weaker ones, as the government has made it very explicit that it will ensure that all such banks meet minimum regulatory capital requirements," says Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.

"At the same time, the government has announced various reforms for public sector banks, but we currently do not believe these reforms are meaningful enough to address the structural corporate governance issues facing these entities," says Vadlamani.

Specifically, the government announced on 24 January that it will infuse INR800 billion into the 21 public sector banks before March 2018, an amount which will materially improve their capital levels.

Each of these banks will receive enough capital to enable them to meet minimum capital norms, after factoring in provisioning requirements for non-performing loans as well as any requirements emanating from a transition to IFRS 9 accounting standards.

Furthermore, 'healthy' banks -- defined as those banks not placed under prompt corrective action by the Reserve Bank of India -- will receive additional capital so as to support overall credit growth.

The recent announcement signals that the government will provide material capital infusions for even weak public sector banks, since IDBI, CBI and IOB, which have the lowest baseline credit assessments (BCA) among rated PSBs, received amongst the highest capital allocations.

As noted, the government has also announced a set of corporate governance reforms at these banks, the most important of which relate to board level governance and corporate loans.

"However, some of these changes, while positive, seem to be largely fine tuning and calibrating some core internal processes at these banks," says Vladlamani.

"For instance, it is now envisaged that a bank's board will monitor the bank's performance on key metrics on a more frequent basis and there should be a performance management system to incentivize and fast track good performers," says Vladlamani. "Banks will also have to more closely monitor corporate exposures beyond a certain size."

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