Increase capital infusion in PSU banks, says Moody’s

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The government should increase its proposed capital infusion in public sector banks because of a surge in bad loans after Reserve Bank of India (RBI) decided to clean up banks’ balance sheets, according to Moody’s Investors Service.

The credit profile of public sector banks will worsen if the government does not increase capital allocation in public sector banks in the upcoming budget, which will be presented on 29 February, Moody’s said.

In 2015, the government had proposed Rs.70,000 crore capital infusion over four years, starting with Rs.25,000 crore in the current financial year (2015-16) and another Rs.25,000 crore in the next financial year. “While the reported NPLs (non-performing loans) of the 11 public sector banks that we rate registered a significant 0.9%-4.1% increase in the most recent quarter ended 31 December 2015, Moody’s view of the true underlying asset quality of these banks has remain unchanged,” Srikanth Vadlamani, Vice President and Senior Credit Officer of Moody’s said.

Moody’s estimates that the 11 public sector banks’ external capital requirements will be Rs.1.45 lakh crore for the four fiscal years, from March 31, 2016 to March 31, 2019.

The estimate factors in the full extent of the asset quality issues that the banks are facing, and not just the extent of impaired loans that have been recognized so far. However, there would be a significant front ending of capital requirements now, it said.

Mr. Valdamani said that the increase in NPLs was because of the recognition of stress in a few large accounts as well as slippages from restructured accounts. Both of these trends have been factored into Moody’s view on the banks’ asset quality.

Many public sector banks reported losses in Oct-Dec after Reserve Bank of India (RBI), found in its asset quality review (AQR) that certain accounts needs higher provisioning and asked the lenders to classify those accounts as non-performing. RBI gave the lenders two quarters – Q3 & Q4 – to complete the task. Most banks have classified 50 per cent of the RBI identified accounts in Q3.