Moody’s warns of weakening capital of public sector banks

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Mumbai: Public sector banks will see their capital ratios deteriorate as provisions increase owing to prolonged asset quality pressures, global ratings agency Moody’s Investor Service said in a note on Thursday.

“We expect the capitalisation profile of the PSBs to further deteriorate, unless the government provides additional capital support,” Moody’s said.

Moody’s estimates that 11 banks will need capital of Rs.1.2 trillion by the year 2020 as against the Rs.45,000 crore the government has planned for in its budget.

Public sector banks have been reeling under a huge stockpile of bad loans. This stockpile has grown after an asset quality review conducted by the Reserve Bank of India in December forced the banks to recognise visibly stressed accounts as bad.

The review asked banks to make appropriate provisions against these loans over two quarters. Lenders were told to conclude making provisions for these accounts by the quarter ended March.

Following the reviews, the provisions and bad loans of banks more than doubled and many lenders reported losses for the December quarter. The aggregate net profit of the 39 listed banks fell 98% to Rs.307 crore in the December quarter fromRs.16,806 crore in the year-earlier period.

The 24 public sector banks were the worst performers, having reported an aggregate loss of Rs.10,911 crore in the December quarter compared to a profit of Rs.6,970.8 crore in the year-ago quarter.

“These banks’ asset quality will remain under pressure over the next 12 months, as they continue to recognize NPLs from some of the larger leveraged corporate groups, particularly in the steel and power sectors,” the rating agency said.

In light of this, the capital infusion proposed by the government would be woefully short.

Also, given that shares of banks have taken a beating and are trading well below their book value, this limits their ability to raise resources from the market.

Moody’s said that although most lenders reported an improvement in their capital ratios for the March quarter, it was largely due to regulatory leeway provided by the RBI.

In March 2016, the RBI issued amended rules that allow the banks to recognize revaluation reserves, deferred tax assets, and foreign currency reserves as common equity Tier-1 (CET1) capital in line with the Basel Committee guidelines, thereby offering a one-off boost to capital levels.