Capital infusion into PSBs not sufficient to support credit growth: Moody’s

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Global credit rating agency Moody’s stated that the government’s ambitious plan of capital infusion to the tune of Rs.2.11 lakh crore into public sector banks will not be sufficient for credit growth in the country. Capital shortfalls of public sector banks in the recent years have been attributed to their asset quality problems and their inability to raise additional capital owing to declining share prices.

capital infusion

Alka Anbarasu, vice president and senior credit officer of Moody’s, stated that this capital infusion will resolve some of the capital requirements of public sector banks on a broader level. However, this will not be enough to meet the requirements of capital growth. She also noted that the capital infusion budgeted for the current fiscal year is likely to result in a modest credit growth of 6% to 8%.

In October 2017, the government announced its plan for Rs.2.11 lakh crore additional capital infusion into the 21 state-run banks in the country. This recapitalisation is scheduled to happen over two fiscal years, 2017-18 and 2018-19. As part of this plan, the government will infuse Rs.65,000 crore this year in various public sector banks.

Moody’s stated that the capital infusion happening this fiscal year will help the banks achieve common equity tier 1 (CIET1) ratio of 8% by March next year.

Capital shortage in public sector banks are higher than what the government has originally expected at the time of recapitalisation announcement. Under the original plan, banks were supposed to raise a portion of the capital. However, most banks fell short already and it is likely to get even more difficult in the future since these banks have witnessed a major decline in share prices.

Moody’s Indian affiliate Icra stated that the asset quality problems of public sector banks in the country reached its peak in March 2018 owing to faster recognition of stressed assets. It also noted that further additions to gross non-performing assets will worsen the asset quality of banks even further.

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