‘Capital shortages to shrink by 2020’ legacy problem loans: Moody’s

New Delhi: The latest move of India government of capital infusions will improve the solvency of banks and significantly boost their provisions for non-performing loans but large volumes of legacy problem loans are yet to be resolved, Moody’s Investors Service said on Thursday. Capital shortages faced by public sector banks (PSBs) will shrink substantially in fiscal 2020 (ending March 31, 2020) because of the announced government allocation of Rs 48,200 crore of capital to 12 PSBs, it said.

The announcement of funds on Wednesday largely completes the final batch of capital infusions under a two-year recapitalisation plan unveiled in October 2017. “The capital infusions will help the PSBs meet regulatory capital requirements and improve provisioning coverage,” said Alka Anbarasu, a Moody’s Vice President and Senior Credit Officer.

In addition, the capital infusions will lead to stronger PSBs having sufficient capital to support credit growth, with some banks able to raise capital from the equity markets as their financials improve, which will reduce the need for future capital injections from the government. “However, many weaker banks will continue to find it difficult to generate sufficient capital internally to meet their capital needs,” said Anbarasu in a statement.

“We believe the government remains committed to resolving the PSBs’ capital needs and will provide capital for them in fiscal 2020, although the government has not included any such plan in its annual budget for the year,” Moody’s estimates that PSBs will require a total of about Rs 20,000 crore to Rs 25,000 crore in external capital in fiscal 2020 to maintain CET1 ratios of about 8.5 per cent for a cushion above the CET1 requirement of 8 per cent under Basel III, including a CCB that will increase to 2.5 per cent. The Rs 20,000 crore to Rs 25,000 crore is a significant reduction from the Rs 1.96 lakh crore infused by the government in the past two years.

The report adds that despite massive capital infusion, full turnaround still at least two years away for PSBs. The fresh round recapitalisation of 12 state-run banks is positive as it will help them improve their core capital but a complete turnaround is still away due to the large quantum of legacy bad loans, the report says. In December 2018, the government increased capital infusions for these banks for FY19 by a combined Rs 41,000 crore to Rs 1.06 lakh crore from the originally planned Rs 65,000 crore.

Rating agency Moody’s Thursday said the capital support to state-run banks have 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,” the Moody’s report said.

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