 "'Provision for capital infusion in PSBs not adequate'")
Ratings agency Moody’s on Friday said the provision of Rs 11,200 crore made in the interim Budget for 2014-15 to inject capital in public sector banks (PSBs) was inadequate to meet Tier-I ratio of eight per cent under Basel-III norms, by March 2015.
The allocation is credit negative for PSBs as it was much less than the Rs 25,000-36,000 crore ($4.1-5.8 billion) banks needed to meet the regulatory norm, Moody’s added.
“Our estimates assume the banks make adequate provisions to meet a minimum 70 per cent coverage ratio under a range of potential asset-quality outcomes,” the agency stated.
The Budget allocation is also smaller than the amounts the central government had injected into PSBs in the past three financial years, Moody’s said.
Indian public-sector banks’ need for significant external capital is a result of an increase in non-performing loans (NPLs). The NPLs have grown significantly owing to the slowing economy and infrastructure bottlenecks. Profitability has proven insufficient for internal capital generation to fund loan growth.
“As of December 2013, rated public-sector banks reported an average gross NPL ratio of 4.3 per cent, up from 3.4 per cent in March 2013. We expect them to continue rising in financial year 2015,” Moody’s said.
“Another reason these banks require external capital is that we expect loan growth rates to remain similar to the 16% year-on-year average recorded as of December 2013. Moreover, the introduction of Basel III raises the amount of capital that Indian banks will need to meet minimum targets”, it added.
Rated Indian banks on average reported Tier 1 ratios under Basel III that are 34 basis points lower than under Basel II in fiscal 2014.
Without sufficient government capital infusions, public-sector banks will be challenged to maintain minimum Tier 1 ratios of eight per cent.
The allocation is credit negative for PSBs as it was much less than the Rs 25,000-36,000 crore ($4.1-5.8 billion) banks needed to meet the regulatory norm, Moody’s added.
“Our estimates assume the banks make adequate provisions to meet a minimum 70 per cent coverage ratio under a range of potential asset-quality outcomes,” the agency stated.
The Budget allocation is also smaller than the amounts the central government had injected into PSBs in the past three financial years, Moody’s said.
Indian public-sector banks’ need for significant external capital is a result of an increase in non-performing loans (NPLs). The NPLs have grown significantly owing to the slowing economy and infrastructure bottlenecks. Profitability has proven insufficient for internal capital generation to fund loan growth.
“As of December 2013, rated public-sector banks reported an average gross NPL ratio of 4.3 per cent, up from 3.4 per cent in March 2013. We expect them to continue rising in financial year 2015,” Moody’s said.
“Another reason these banks require external capital is that we expect loan growth rates to remain similar to the 16% year-on-year average recorded as of December 2013. Moreover, the introduction of Basel III raises the amount of capital that Indian banks will need to meet minimum targets”, it added.
Rated Indian banks on average reported Tier 1 ratios under Basel III that are 34 basis points lower than under Basel II in fiscal 2014.
Without sufficient government capital infusions, public-sector banks will be challenged to maintain minimum Tier 1 ratios of eight per cent.