PSBs recap plan insufficient to support credit growth: Moody's

Global ratings agency Moody's today said the government's recapitalisation plan for 21 state-run banks will help them in meeting regulatory capital needs, but will be insufficient to support credit growth.

In October 2017, the government had announced a bank recapitalisation plan of Rs 2.11 lakh crore over two fiscals, 2017-18 and 2018-19. In the this fiscal, the government has budgeted a capital infusion of Rs 65,000 crore.

"The recapitalisation plan will still broadly resolve the regulatory capital needs of the country's 21 public sector banks (PSBs) and help augment the banks' loan-loss buffers, but will be insufficient to support credit growth," the agency's vice president and senior credit officer, Alka Anbarasu, told reporters here today.

After the budgeted capital infusion of Rs 65,000 crore, all PSBs will have common equity tier 1 (CET1) ratios exceeding the 8 per cent minimum, by March 2019.

However, this development assumes overall credit growth for the PSBs of a modest 6-8 per cent in this fiscal, she said.

The PSBs' capital shortfalls are larger than the scale that the government had expected when it had announced the recapitalisation in October 2017.

It is mainly because the banks have failed to raise additional capital from the market and it may be difficult for them to raise more capital given the substantial decline in their share prices, she said.

The share prices of the PSBs have declined by 19 per cent since beginning of the year.

The recapitalisation plan of October 2017 has anticipated that the banks would raise close to Rs 58,000 crore from the equity market. However, they have so far raised only about Rs 10,000 crore.

The capacity of these PSBs to generate internal capital has deteriorated because of their weak financial performance and a sharp increase in government bond yields, which hurt their investment income, Anbarasu said.

Moody's Indian affiliate Icra said with the accelerated recognition of stressed assets during FY18, the asset quality problems of the banks peaked in March 2018.

Icra's senior vice president, (financial sector ratings), Karthik Srinivasan, said further additions to gross non-performing assets (GNPAs) will decline with fresh slippages falling to around 3 per cent during FY19 compared to 7.1 per cent during FY18 and 5.5 per cent during FY17.

He said with the likely resolution of large stressed borrowers under the insolvency and bankruptcy code (IBC) 2016 and proposed resolution under the revised framework for resolution of stressed assets, the recoveries and upgrades are expected to surpass the fresh addition to GNPAs during FY19.

It is expected in turn to result in a decline in the GNPAs and net NPAs to below 9 per cent and 5 per cent, respectively by March 2019, Srinivasan said.

Moody's further said credit quality of the country's non-financial corporates (NFC) will remain supported by a robust growth outlook for the domestic economy and a benign outlook for global economic growth.

"As disruptions from GST implementation fades, economic activity will recover in the country," Moody's corporate finance group senior vice president, Vikas Halan, said.

A GDP growth of 7.3 per cent for 2018 will result in higher domestic sales volumes, which along with new production capacity and supportive commodity prices will support EBITDA growth for corporates over the next 12 to 18 months, he added.