India’s bank recapitalisation to provide short-term growth boost
KUCHING: RAM Ratings expects India’s 2.1 trillion rupee bank recapitalisation plan, announced in October 2017, to provide some relief to the country’s public sector banks, which would spur lending in the near-term.
India’s fragile banking system is viewed as a key moderating factor to the sovereign rating, RAM said, as it represents a constraint to economic growth and an ongoing liability to the Government.
Currently, India carries respective gBB2( pi)/ positive/ gNP(pi) and seaBBB2(pi)/positive/ seaP3(pi) ratings by RAM on its global and Asean rating scales.
“The re c a p i t a l i s a t i o n programme, which spans two fiscal years, will be funded through bonds issued by the government ( 1.3 trillion rupee) and direct budgetary support (0.8 trillion rupee).
“This exercise would provide relief to public sector banks (PSBs), which had recorded their first aggregate annual loss in 20 years in the year ending March 2016,” it detailled in a statement yesterday.
“Given that previous capital infusions from the Government were less than 500 billion rupee per fiscal year, the size of the current recapitalisation programme underscores the urgency of the administration to resolve the capital issues of the PSBs.”
The authorities estimate that the current recapitalisation exercise will be sufficient to increase the PSB’s capital ratios to meet Basel 3 requirements by 2019.
At present, India’s PSBs, which hold 71.3 per cent of the system’s assets, account for 89 per cent of the system’s non-performing loans.
RAM saw that the persistent increase in the PSBs’ nonperforming loans ratio – which stood at an elevated 9.4 per cent of its total loans as at March 2016 – has caused a similar deterioration in its capital ratio and reduced their capacity to lend.
“Consequently, we view that there will be a revival in loans growth from the PSBs throughout this recapitalisation exercise which may provide a boost to short-term economic activity,” it added.
“That said, the longer- term impact to growth is uncertain given weak lending standards and as impediments to business activity persist.
“Without a resolution to these structural issues via reforms and a broad-based strengthening of governance standards, it is possible that India’s banks would eventually revert to its current state despite the expected acceleration in lending.”
Thus, RAM believed the recapitalisation programme is expected to affect the fiscal deficit through the increased direct budgetary support component of the programme and the resulting higher debt servicing cost – due to the issuance of the bonds.
“India’s fiscal position is a rating constraint as the budget deficit is significant at 6.5 per cent of GDP as at end-March 2017 while its elevated interest-to-revenue ratio of 17.3 per cent is among the highest in RAM’s sovereign rating portfolio.
“Concurrently, the addition to India’s already-significant debt burden of 68.6 per cent of GDP by 1.3 trillion rupees will further constrain its ratings.”