Recapitalisation solved solvency issue, but PSB turnaround awaited: Moody's

PSB executives said banks will look at expanding their loan books with focus on the retail, agriculture and micro, small and medium enterprises segment

The recapitalisation of 12 state-owned banks will improve their core capital, crucial for meeting regulatory norms. But, it will take four-five quarters for them to show stable performance, leading to profitability, according to bankers.
 
Senior public sector bank (PSB) executives said banks will look at expanding their loan books, albeit cautiously. The focus will be on the retail, agriculture and micro, small and medium enterprises (collectively termed RAM) segment where the demand is robust and risks are spread over a large number of borrowers.
 
On Wednesday, the government announced a Rs 48,239-crore capital infusion into 12 public sector banks in this fiscal year to help them maintain regulatory capital requirements and finance growth plans.
 
One such lender, Corporation Bank — which may exit the Reserve Bank of India’s Prompt Corrective Action (PCA) regime by the end of March — expects to clock business (deposits plus advances) of Rs 4 trillion, in medium term. Business has shrunk from Rs 3.27 trillion in December 2017 to Rs 2.95 trillion at end of December 2018. At present credit to deposit ratio stands at 66 per cent.
 

A Corporation Bank executive said the book shrunk because of certain restrictions on lending. Now there will be headroom to grow loans, and RAM will remain a priority.
 
Rating agency Moody’s on Thursday said the capital support to state-run banks has been increased from the original plan as banks’ capital shortfalls have grown larger than the initial projections.
 
“However, these banks are far from a complete turnaround as large volumes of problem-loans will still continue to cap improvements in profitability and capitalisation, constraining their credit profiles," Moody’s said in a report.
 

A key hindrance to a faster turnaround of these banks is the slow progress in the resolution of legacy bad loans and the need to build up provisions against those assets.
 
“Although the resolution process at bankruptcy courts (National Company Law Tribunals) has been initiated for most large NPA (Non-performing asset) accounts, progress has been slower than we anticipated, and a complete cleanup of legacy problem loans could take more than two years,” the agency said.
 
It said farm loan waivers, which three states have granted since November 2018, are a risk because these measures can incentives borrowers to not repay their loans, contributing to more bad loans in the agri lending books, agency added.