Moody's Investors Service on Thursday said India's economic recovery reduces the risk of a sharp deterioration in public sector banks' asset quality, but the capital would remain insufficient to support credit growth and absorb unexpected shocks.
With high credit costs continuing to suppress their profitability, the banks' capital buffers will remain insufficient. The government plans to infuse Rs 20,000 crore in equity capital into PSBs next fiscal. While the amount will help the banks meet Basel capital requirements, it will not boost credit growth, Moody's said.
"We expect the Indian economy to recover in 2021, and this reduces the likelihood of a sharp deterioration of asset quality at the banks. However, they will continue to face capital shortages as their profitability remains weak," Moody's said in an update on public sector banks.
Moody's Assistant Vice President and Analyst Rebaca Tan said various measures by the Indian government to support borrowers have helped curb growth in public sector banks' non-performing loans (NPLs), and the volume of restructured loans is not as large as we anticipated.
Asset quality at the five largest rated public sector banks (PSBs) in India State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India improved mildly in the first nine months of the year ending March 2021 (fiscal 2021) despite an economic contraction exacerbated by the pandemic.
However, India's public sector banks will continue to face capital shortages as their profitability remains weak given high credit costs, leaving them vulnerable to any unexpected stress, the agency said.
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