HYDERABAD: Shares of 12 Public Sector Banks (PSB) rallied on Thursday following the government’s latest bank recapitalisation programme. Though the move will improve the banks’ solvency ratios, it is unlikely to resolve the legacy of bad loans, say analysts.
On Thursday, shares of some banks such as Corporation Bank, Central Bank of India and United Bank of India gained between 10 and 20 per cent during early trade, following the capital infusion announcement. However, the BSE banking index closed a mere 0.23 per cent higher over its previous close, while respective shares of PSBs too ended moderately.
According to Bank of America Merrill Lynch, the fresh round of capital infusion will lower lending rates. “We expect banks to cut lending rates by 50 bps by March 2020, reversing the 30 bps hike in 2018,” it noted.
However, other rating agencies like Moody’s believe that though recapitalisation helps improve banks’ core capital, a complete turnaround is still away due to the large quantum of legacy bad loans. “Although the resolution process at bankruptcy courts has been initiated for most large NPA accounts, progress has been slower than we anticipated, and a complete cleanup of legacy problem loans could take more than two years,” Moody’s said.
With the latest round, capital infusion by government stands at Rs 1.06 lakh crore for FY19, up from the originally planned Rs 65,000 crore. “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 policies,” it said.
Meanwhile, farm loan waivers, which three states have granted since November 2018, are a risk because these measures can incentivise borrowers to not repay loans, contributing to more bad loans in the agri-lending books. Besides, vulnerabilities linger among MSMEs as reflected in the spike in bad loans.
According to Moody’s, the fresh capital will enable banks to use operating profit to significantly boost provisions for bad loans. It expects state-run banks’ capital shortages to shrink substantially in FY20 as their asset quality improves, which will lead to declines in credit costs and gains in profitability. “We estimate that state-run banks will require a total of about Rs 20-25,000 crore in external capital in FY20 to maintain CET-1 ratios of about 8.5 per cent,” Moody’s said.