The government’s move to recapitalise public sector banks (PSBs) has received support from rating agency Moody’s, which On Monday said that it would strengthen their financial position.
“We would consider such an event as a positive credit development that could alleviate rating pressure on banks in need of fresh capital to sustain their growth,” Moody’s Vice-President and Senior Analyst Nondas Nicolaides said in a report.
While all Indian banks are above the 9 per cent capital adequacy ratio (CAR) mandated by the Reserve Bank of India, the government decided to infuse Rs 20,000 crore last year to ensure that their CAR stayed above 12 per cent.
The move was partly a result of higher loan demand from state-controlled banks as private and foreign lenders have considerably slowed down lending in recent months. With the law restricting the government’s ability to reduce its stake in PSBs below 51 per cent, most banks were finding it difficult to raise capital.
Last week, in her address to parliament, President Pratibha Patil had flagged recapitalisation as one of the key elements of the government’s policy over the next few months.
“Considering the relatively high loan growth rates recorded by these banks in the last few years, we believe that the need for new capital in PSBs is vital in the context of India’s challenging credit environment. Any commitment by the Indian government to recapitalise PSBs is welcome from a creditor’s, and thus, rating agency’s perspective. This will not only increase the banks’ Tier-I and tangible equity ratios besides supporting their future loan expansion, but also enhance their loss absorption capacity,” Moody’s said in the report.
The report added that during the current difficult market conditions, banks’ equity buffer was an important rating driver, as strongly capitalised banks could sustain possible loan losses stemming from an adverse credit cycle.
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“Evidence in the market suggests a significant slowdown in both domestic demand for goods as well as a sharp decline in exports, which will challenge the cash flow and loan repayment ability of Indian corporations. We also have observed that PSBS are now much more cautious in their assessment of the credit quality of new loan proposals and that the majority of new loans are geared towards meeting their clients’ core working capital needs as opposed to funding new, riskier projects.
“Nonetheless, asset quality at PSBs is bound to deteriorate over the short-to-medium term, while the level of restructured loans is also expected to increase significantly, therefore elevating their credit risk profile. In our opinion, having a strong Tier-I and tangible equity capital base in the current environment provides a solid line of defence to a bank’s true solvency position and acts as a shield to its ratings,” the report added.