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  3. Govt’s Rs 2.1 lakh crore recapitalisation plan positive for banks’ ratings: Fitch

Govt’s Rs 2.1 lakh crore recapitalisation plan positive for banks’ ratings: Fitch

27 Oct 2017 Evaluate

Global rating agency, Fitch ratings in its latest report has said that the government’s Rs 2.1 lakh crore recapitalisation plan for public sector banks (PSBs) is positive for banks’ ratings. It also highlighted that the move will provide substantial funds to the lenders to address the capital shortages that have a major negative influence on the viability ratings of the banks. It also noted that Indian banks’ viability ratings would come under more pressure if their capital shortage problem is not addressed.

As per the report, the government’s plan is to provide capital to all banks that need it, which carries some risk of encouraging moral hazard. However, it said that the size of capital allocations is to be determined by performance, which suggests the largest share will go to stronger banks, while some banks particularly smaller, struggling ones could still be swept up into the government’s consolidation agenda. The report further said that recapitalisation bond if issued by the government could affect its target to reduce central fiscal deficit to 3.2 per cent of GDP this year.

Adding further, Fitch ratings  has enlightened that the recapitalisation plans could make this target more difficult to achieve if recapitalisation bonds are to be issued by the central government, which might mean expenditure cuts elsewhere. It indicated that recapitalisation bonds would still imply contingent liabilities for the government if they are instead issued by quasi-government institutions. It also mentioned that from a sovereign rating perspective, the additional pressure on fiscal balances could be more than offset by the beneficial impact recapitalisation may have in eventually helping to return the banking sector to health, which would support the longer-term economic outlook and reduce uncertainty.

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