Global rating agency Moody’s Investors Service in its latest report has said that the decision of the Reserve Bank of India’s (RBI) board to extend the timeline for the full implementation of Basel 3 norms by a year is a credit-negative for Indian public sector banks (PSBs). It also said that the decision to restructure stressed standard assets of micro, small and medium enterprises (MSME) borrowers with aggregate credit facilities of up to Rs 25 crore too has the potential for having negative implications for the credit profiles of Indian banks.
The US-based rating agency expects that all PSBs would have a core equity tier 1 (CET1) ratio of at least 8 percent by the end of March 2019, based on the government's commitment that it would capitalize all these banks to a level sufficient to meet the minimum regulatory capital norms. It said 'with the regulatory timelines now extended, it may be a case that at least some of the rated public sector banks' CET1 ratios over the next 12 months would be lower than what we currently expect.'
Talking about RBI's proposed MSME loan restructuring scheme, the report noted that the track record of such asset classification, when seen over the last few years in India, has shown that they have largely been unsuccessful in addressing the underlying stress. On the contrary, it said that keeping stressed loans in the standard category has led to an underestimation of the extent of underlying asset quality issues by bank managements, and consequently the severity of the actions that they need to take to address the issue.