"The allocation (of Rs 11,200 crore) is credit negative for public-sector banks because it is much smaller than Rs 25,000-36,000 crore (USD 4.1-5.8 billion) that we estimated the banks needed to meet a minimum Tier 1 ratio of 8 per cent in the fiscal year ending March 2015," it said in a report.
In his interim Budget presented on Monday, Finance Minister P Chidambaram proposed to infuse Rs 11,200 crore in PSU banks to enhance their capital in the next fiscal.
Moody's said the Budget allocation is also smaller than the amount the Government has injected into public sector banks in the past three fiscal years.
The Centre infused Rs 14,000 crore in the state-run lenders in this fiscal. In FY12, it had pumped in Rs 17,000 crore, while in FY13 the amount stood at Rs 12,500 crore.
"Public sector banks' need for significant external capital is a result of an increase in non-performing loans (NPLs) owing to slowing economy and infrastructure bottlenecks , and profitability that is insufficient for internal capital generation to fund loan growth," the report said.
As of December 2013, rated Government banks reported an average gross NPL ratio of 4.3 per cent, up from 3.4 per cent in March 2013, and Moody's expects them to continue rising in FY15.
The report highlighted that the 90 basis points increase in the March-December 2013 period in NPL exceeds the average increase of 50 basis points for the fiscal year ended March 2013 and 78 basis points for FY12.
As a result of rising NPLs and lower profitability, provision expense rose to 65 per cent of rated PSU banks' pre- -provision income for the first three quarters of the fiscal year from 49 per cent a year earlier, it said.