MUMBAI: The Indian government’s bank recapitalisation plan for FY18 is sufficient enough to meet capital adequacy norms and improves provisions against bad loans in loss-making banks, but stress will continue, said Moody’s.
In the absence of reforms, the government will continue forking out capital into banks, straining its own finances and hindering efforts of fiscal consolidation, it added.
According to the ratings agency, although the government support will help PSBs build their capital and provisioning buffers against losses, these improvements could only prove to be temporary in absence of any broader reform to fundamentally strengthen their weak underwriting practices.
“The large-scale recapitalisation plan was meant to improve capital buffers and loan-loss reserves and also support sufficiently strong loan growth,” said Alka Anbarasu, Vice President and Senior Credit Officer, Moody’s. She added that it will now be enough to shore up capital ratios above the regulatory requirement because the banks’ capital shortfalls have grown larger than the government’s initial projection.
In order to maintain capital buffers at regulatory levels, banks have to keep loan growth modest, at 5-6 per cent, which means the government has little choice but to increase capital support if it seeks faster loan growth to support economic expansion, she explained. Meanwhile, Moody’s also believes that the public sector banks’ external capital needs will not grow much further after fiscal 2019 considering the imbalances in profitability and credit costs, in tandem with the ongoing balance-sheet clean-up programme.
The capital infusion enables banks to strengthen their provision coverage, but may not be sufficient enough if they take large write-downs on NPAs. An increase in provisions could raise their capital needs significantly, Moody’s noted.
The capital infusion will be just enough to achieve the Common Equity Tier 1 (CET1) ratio of at least 8 per cent by March 2019, complying with the 2.5 per cent conservation buffer on top of the 5.5 per cent minimum under Basel III norms in India — giving banks a capitalisation profile on par with their global peers.
Currently, the government plans to provide Rs 65,000 crore (Rs 11,300 crore disbursed in July) for PSBs this fiscal, over and above the Rs 90,000 crore pumped in the previous year.