The allocation of Rs 14,000 crore by the Government to 20 public sector banks is credit positive because it improves the odds they will meet regulatory capital requirements while maintaining loan growth to economically important sectors, said Moody’s.
Regulatory minimum under Basel II norms
Before the capital infusion, the international credit rating had estimated that at the end of fiscal 2014, just six of the 11 public-sector banks it rates would have reported Tier 1 capital ratio of more than 8 per cent regulatory minimum under Basel II.
The Government’s capital infusion will not only raise the capital level of all rated banks, but Moody’s also expects that it will allow three more banks to meet the minimum. In fiscal 2013, the Government injected Rs 12,500 crore into 13 public-sector banks.
“Even so, the need for larger capital injection to an ever-greater number of public sector banks is symptomatic of the more fundamental economic and credit challenges that capital injections are not addressing,” the agency said in a statement.
Lending to continue
The capital allocation, according to Moody’s, reaffirms its view that the Government will continue to encourage public sector banks to keep lending despite India’s challenging economic environment. However, it does not leave the banks better equipped to withstand the risks of further asset quality deterioration.
“The bank’s gross non-performing loan ratio rose to a weighted average of 4.3 per cent in June, the highest in more than five years, and a similar rise in restructured loans suggests that provisioning costs might further increase.
“As such, the benefits of capital injection might last shorter than our assumptions based on past trends suggest,” said the rating agency.
Basel II Tier I threshold
Moody’s is of the view that the capital injection will allow IDBI Bank, Central Bank of India and Bank of India to remain over the Basel II Tier 1 threshold in fiscal 2014. Without the capital injection, they would have fallen short of that threshold, assuming loan growth and profit levels similar to that of past years.
However, Moody’s anticipates that Indian Overseas Bank and Union Bank of India may face difficulties in meeting the 8 per cent target at the end of fiscal 2014 even after the capital infusion.