PSBs' capitalisation challenge not addressed: Moody's

The banks need capital to support loan growth, comply with Basel-III regulations and improve their loan loss coverage

Moody’s, the global rating agency, said on Monday that the Union Budget had failed to make adequate provision for injecting capital in public sector banks (PSBs).

The Budget had failed to increase the Rs 11,200 crore the previous government had committed for PSB recapitalising in the year ending 2015. The outlay was lower than in 2013-14 and not enough for these banks’ high capital requirements, Moody’s stated.

The banks need capital to support loan growth, comply with the Basel-III regulations and improve their loan loss coverage.

Gene Fang, vice-president, Moody's Investors Service, said the Budget had not addresses the banks' immediate challenges, especially capitalisation. The few measures announced would not bring real benefits until 2015 or later.

The new government has pledged to reduce the government’s stake in state-owned banks to not more than 51 per cent from the current 56-89 per cent. This would eventually give the banks greater flexibility to raise capital from the equity market.

In the near term, however, this won't help. The key constraint on PSBs' external capital raising has been inability to attract fresh private capital. It remains to be seen whether investors’ appetite for Indian public sector bank equity has increased, which is something the Budget has little to no ability to influence, said Moody's.

Nevertheless, some targeted measures in the Budget are credit positives, it said.

The Budget promised some funding relief to the real estate and infrastructure sectors, which could also help improve their loan performance.