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S&P lauds Rs 70,000 cr capital infusion, says PSB reforms remain lacklustre

The global rating agency's calculation of risk-adjusted capital for most rated Indian PSBs is 5-7 per cent, and this is one of the key rating constraints

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Global rating agency Standard and Poor’s (S&P) said today that the government’s decision to infuse of Rs 70,000 crore capital in public sector banks (PSBs) is credit positive for the banking sector. However, it added that the progress of governance reforms at state-owned banks has been lacklustre. 

The capital infusion proposed in the Union Budget for 2019-20 will allow PSBs to take the necessary haircuts on weak corporate loans and help them shore up their capital adequacy. This may also bring some banks out of the Reserve Bank of India (RBI)'s Prompt Corrective Action (PCA), so that they can resume lending and clean up their balance sheets, said S&P Global rating credit analyst Geeta Chugh.

Details on the capital allocations for banks and their funding are yet to be revealed. 

S&P Global Ratings' calculation of risk-adjusted capital for most rated Indian PSBs is 5-7 per cent, and this is one of the key rating constraints.

The agency said PSBs still require substantial reforms to improve risk management, service quality, efficiency, and diversity of product offerings. While the government has infused large amounts of capital into PSBs in the past few years, the progress on reforms has been rather uninspiring.

The government announced that the reforms will be undertaken to strengthen governance in PSBs, though no specific details have been shared.

On government guarantees to PSBs to provide liquidity support for non-banking finance companies, S&P said this will shore up demand for these assets. 

The budget proposals may help NBFCs sell their highly-rated retail pool of assets, address their immediate liquidity needs and correct asset-liability mismatches. However, the asset-quality stress emanating from their wholesale real estate related portfolio will not be alleviated, rating agency pointed out.

PSBs' purchase of high-rated pooled assets of Rs one trillion will now be eligible for a one-time six-month partial credit guarantee by the government for a first loss of up to 10 per cent.

The Reserve Bank of India (RBI), the country's central bank, will also facilitate these transactions by providing banks a liquidity backstop against their excess holdings of government securities.

The government also announced the amendment to the Reserve Bank of India Act to strengthen the powers of the central bank over non-government-owned NBFCs and allow for effective resolution of stressed financial institutions.

Such a move would help address the trust deficit that the sector has been struggling with in the past few months, S&P said.

The growth and profitability of non-banking finance companies in India has been under pressure the past nine months as the cycle of easy liquidity and low cost of funds reversed. 

The top-tier retail-focused companies are better placed to withstand the liquidity stress, while wholesale focused finance companies without strong parentage are relatively more stressed. In particular, companies with exposure to commercial real estate are under greater stress.