Capital infusion to be credit positive for public sector banks, says Moody’s

Updates from : The Hindu .

Govt. may have factored in higher credit growth as compared to last three years

The Centre’s decision to infuse ₹2.11 lakh crore into public sector banks will be credit positive and the amount is large enough to comprehensively address their weak capital profile, rating agency Moody’s said.

“This is a significant credit positive as weak capitalisation is the main credit weakness for most rated public sector banks,” according to a statement from Moody’s Investor Service.

The rating agency said the Centre had taken similar steps in the past when these bonds had relatively longer maturity and did not have much market liquidity. A similar structure this time would have some negative implications for the banks’ liquidity and profitability profiles, it added.

“However, given that the overarching credit weakness of the public sector banks currently is their weak capitalisation levels, we would see infusion of the recapitalisation bonds as a significant credit positive, notwithstanding some of these potential weaknesses in their structure,” it said.

For the 11 rated public sector banks by Moody’s, the rating agency estimates that their external capital requirements over the next two years would be about ₹70,000 crore to ₹95,000 crore.

This estimate factors in the capital requirements for compliance with Basel-III norms and for conservative recognition and provisioning of their asset quality problems.

Capital needs

“In addition to the fact that Moody’s estimates of capital requirements is for only the 11 rated banks while the government factors in the entire PSU bank universe, the government’s estimate of capital requirements could also be factoring in a much higher loan growth than was seen in the last three years,” the agency said.

Moody’s also said PSU banks could now consider accessing market to raise capital. Subdued valuation had been a constraint for them thus far.

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