Modi’s PSU bank recapitalisation will improve solvency, but will not solve legacy loan issue

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Published: February 21, 2019 5:52:28 PM

Government’s latest capital infusion of Rs 48,239 crore in PSU banks will improve their solvency and boost their bad loan provisioning, but will not address the large volume of legacy loan problems, which are yet to be resolved, Moody’s said in a report today.

The capital shortages faced by Indian PSU (public sector undertaking) banks will shrink substantially in fiscal year 2019-20 because of the government allocation of Rs 48,200 crore of capital to 12 lenders, said the report. “The capital infusions will help the PSBs meet regulatory capital requirements and improve provisioning coverage,” said Alka Anbarasu, Vice President and Senior Credit Officer, Moody’s Investor Services, in a statement.

State-run banks would need about a further Rs 20,000-25,000 crore in external capital in FY20 to maintain Common Equity Tier 1 (CET1) ratios of about 8.5 per cent, which is above CET1 requirement of 8 per cent under Basel III, including a Capital Conservation Buffer (CCB), which will increase to 2.5 per cent.

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Many weaker banks will continue to find it difficult to generate sufficient capital internally to meet their capital needs, Anbarasu said. However, she added that they believe the government remains committed to resolving the banks’ capital needs and will provide capital for them in fiscal year 2019-20. The report also noted that the government has not included any such plan in its annual budget for the year.

The move to recapitalise PSU banks has been taken to strengthen the financial performance of these banks and help them deal with the central bank’s prompt corrective action (PCA) plan. With this, the government has largely completed the final round of capital infusion under the Rs 2.11 lakh crore recapitalisation plan announced by Finance Minister Arun Jaitley in October 2017.

The capital infusion would make PSU banks stronger so that they have sufficient capital to support credit growth, with some banks able to raise capital from the equity markets as their financials improve, which will reduce the need for future capital injections from the government, the report added.

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