PSB’s recapitalisation plan significant credit positive: Moody's

26 Oct 2017 Evaluate

Terming government’s plan to infuse Rs 2.11 lakh crore in public sector banks (PSBs) as ‘significant credit positive’, global rating agency, Moody's Investors Service has said that it will help to address the problem of weak capitalisation. It also said that the quantum of the plan is large enough to comprehensively address these banks' weak capitalisation levels and is a significant credit positive as weak capitalisation is the main credit weakness for most rated public sector banks.

For the 11 rated PSBs, Moody’s estimates that PSBs external capital requirements over the next two years would be around Rs 70,000-95,000 crore, factoring in the two main drivers of their capital needs - the need to comply with Basel III requirements, and for conservative recognition and provisioning of their asset quality problems. It said even if only the recapitalisation bonds and the already announced budgetary support are factored in, the announced capital infusion by the government should be able to comfortably address the capital requirements of the PSBs.

The inability of most of the PSU banks to access the equity capital markets has also been a key constraint on their capital levels. With much greater visibility now on these banks receiving adequate capital from the government, they may also accordingly regain market access. Moody’s further said there is significant scope for the government to reduce its current shareholdings in these banks and still maintain majority ownership.

The government had used the recapitalisation bond route to recapitalise public sector banks. The US-based agency has said that those instruments typically had relatively long maturities and didn’t have much market liquidity. A similar structure this time would have some negative implications for the banks’ liquidity and profitability profiles. It expects that all rated PSBs would get enough capital to satisfy their Basel III capital requirements as well as adequately address their asset quality challenges. It added that while the extent of improvement may vary but it expects the capitalisation profiles of all rated PSBs to improve.

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