RBI's capital norms decision credit negative: Moody's

RBI board's decision to extend the timeline for banks to implement Basel 3 norms is credit negative for public sector lenders, Moody’s Investors Service Tuesday said, hours after the marathon Board meet.

The decision to extend the timeline for the full implementation of Basel 3 guidelines by a year is a credit negative for Indian public sector banks,” Moody’s Investors Service Vice President (Financial Institutions Group) Srikanth Vadlamani said in a statement.

“With the regulatory timelines now extended, it may be a case that at least some of the rated public sector banks' CET1 ratios over the next 12 months would be lower than what we currently expect,” he said.

Moody's expected all public sector banks to have a core equity tier 1 (CET1) ratio of at least 8% by the end of March 2019, based on the government's commitment that it would capitalise the PSU lenders to a level sufficient to meet the minimum regulatory capital norms.

The Board had on Monday decided to extend the timeline for Indian banks to set aside an additional 0.625% as capital conservation buffer by one year to March 31, 2020 to help banks to lend more.

On restructuring of stressed MSME loans, Moody’s said the track record of such asset classification, when seen over the last few years in India, has shown that they have “largely been unsuccessful in addressing the underlying stress”.

On the contrary, keeping stressed loans in the standard category has led to an underestimation of the extent of underlying asset quality issues by bank management, and consequently the severity of the actions that they need to take to address the issue, Vadlamani said.

The board had advised the RBI consider a scheme for the restructuring of stressed standard assets of MSME borrowers with a loan of upto Rs 25 crore, subject to conditions necessary for ensuring financial stability.