Recap plan won’t boost credit growth: Moody’s

Rating agency Moody’s Investors Service on Thursday said that the government’s recapitalisation plan is expected to broadly resolve the regulatory capital needs of the country’s 21 public sector banks ( PSBs) and help augment the banks’ loanloss buffers, but will be insufficient to support credit growth.

“The PSBs’ capital shortfalls are larger than the scale that the government had expected when it announced the recapitalisation in October 2017, mainly because the banks have failed to raise additional capital from the market and it may be difficult for them to raise more capital given the substantial decline in their share prices since the beginning of 2018. Moreover, the capacity of these 21 banks to generate internal capital has deteriorated because of their weak financial performance and a sharp increase in government bond yields, which hurt their investment income,” said Alka Anbarasu, vice- president and senior credit officer at Moody’s.

The discovery of ` 14,400 crore of fraudulent transactions at PNB has substantially increased the capital needs of that bank. Under its recapitalisation plan, the government plans to infuse ` 65,000 crore into the PSBs in fiscal 2019, following the ` 90,000 crore infused in fiscal 2018.

According to Moody’s analysis, after the budgeted capital infusion of ` 65,000 crore, all PSBs will have Common Equity Tier 1 ( CET1) ratios exceeding the 8 per cent minimum, by March 2019.

However, this development assumes overall credit growth for the PSBs of a modest 6 per cent – 8 per cent in the next year, with the relatively stronger banks having room to grow, but the weaker institutions continuing to shrink their balance sheets to conserve capital.

The agency believes that the key variable to the quantum of capital infusions is the government’s own policy decision on whether it wants a higher level of credit growth in the system, given the potential macro- economic implications.