Cap infusion in PSBs not enough for credit growth: Moody's

Global rating agency Moody's on Thursday raised doubts over any betterment in the health of public sector banks through the government's planned capital infusion, saying it may not be enough to support credit growth.

“The Indian government's recapitalisation plan will still broadly resolve the regulatory capital needs of the country's 21 public sector banks (PSBs) and help augment the banks' loan-loss buffers, but will be insufficient to support credit growth,” Moody's Investors Service said.

"The PSBs' capital shortfalls are larger than the scale that the government had expected when it announced the recapitalisation in October 2017, mainly because the banks have failed to raise additional capital from the market and it may be difficult for them to raise more capital, given the substantial decline in their share prices since the beginning of 2018," Alka Anbarasu, Moody's Vice President and Senior Credit Officer said in a note.

"Moreover, the capacity of these 21 banks to generate internal capital has deteriorated because of their weak financial performance and a sharp increase in government bond yields, which hurt their investment income," Anbarasu said.

After the Budgeted capital infusion of Rs 65,000 crore, all PSBs will have common equity tier 1 (CET1) ratios exceeding the 8% minimum, by March 2019. However, this development assumes overall credit growth for the PSBs of a modest 6-8% in the next year, with the relatively stronger banks having room to grow, but the weaker institutions continuing to shrink their balance sheets to conserve capital, she said.

Moody's Indian affiliate Icra said that with the accelerated recognition of stressed assets during FY18, the asset quality problems of the banks peaked in March 2018.

Icra Senior Vice President (Financial Sector Ratings) Karthik Srinivasan said that further additions to gross non-performing assets (GNPAs) will decline with fresh slippages falling to around 3% during FY19, compared to 7.1% during FY18 and 5.5% during FY17.