Mumbai : The Indian government’s recapitalisation programme will support public sector banks’ credit profiles as the fund infusion will help them mitigate the risks faced due to weak asset quality and poor earnings, Fitch Ratings said on Thursday. However, unwinding of these risks will take some time, Fitch added, implying that the resolution of bad assets and continued high credit cost will hinder the banking sector’s performance in the near-term. Factoring in these pressures, Fitch maintains its negative outlook on India’s banking sector.

  On Wednesday, the government announced infusion of 881.39-billion rupee-capital into public sector banks, including 800 billion rupees through recapitalisation bonds, in the current financial year ending March. The remaining 81.39 billion rupees will be brought in through budgetary support. This capital infusion is part of the 2.11-trillion-rupee recapitalisation of public sector banks announced by the government in October. Fitch said the recapitalisation plan for state-owned banks was lower than its estimate of $65 billion. The government’s decision to front-load the fund infusion in January through recapitalisation bonds will put banks in a slightly better position to absorb losses expected from resolution of non-performing assets, Fitch added.

Moody’s Take

Meanwhile, another global ratings major, Moody’s Investors Service, on Thursday, said the Indian government’s capital infusion into public sector banks was credit positive, especially for the weaker banks. However, certain reforms fall short of addressing structural governance in such banks, it added. “…the government has made it very explicit that it will ensure that all such banks meet minimum regulatory capital requirements,” Srikanth Vadlamani, vice-president and senior credit officer of Moody’s said in the report.”At the same time, the government has announced various reforms for public sector banks, but we currently do not believe these reforms are meaningful enough to address the structural corporate governance issues facing these entities,” Moody’s added.

Charting out the government’s bank recapitalisation plan, Finance Minister Arun Jaitley stated that all loans above Rs 250 crore will undergo special monitoring. “We inherited a very major problem. The problem is of the past. Our objective was to find solution and create an institution so that the mistakes are not repeated,” he told reporters in the capital on Wednesday.

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