The recent recapitalisation plan announced by the government for public sector banks will provide substantial funds to the lenders to address the capital shortages that have a major negative impact on their ratings, says a report.
The government recently announced to infuse Rs 2.1 trillion ($32 billion) in state-run lenders over a two-year period. Under the current plan, Rs 1.35 trillion of the total amount will come from recapitalisation bonds and Rs 0.76 trillion from budgetary support and fund-raising in the capital markets over the next two years.
“The recapitalisation plans for state banks is a significant change from the drip-feed approach pursued over the last few years and should help to address the capital shortages that are a major negative influence on the viability ratings of the banks,” Fitch Ratings said in a report.
Last month, the international rating agency estimated that Indian banks would require around $65 billion of additional capital to fully meet the new Basel III capital standards that will be implemented by end of March 2019.
It also estimated that the state banks, which account for 95 per cent of the shortfall, would be dependent on the government to meet these requirements.
The banks’ viability ratings would come under more pressure if the problem was not addressed, it had said.
“The latest planned injections will go a long way in plugging the total capital gap. They also exceed the $6 billion-7 billion that we estimated the government would need to pump in on a bare minimum basis (excluding buffers) to address weak provision cover and aid in effective NPL resolution,” the Fitch report said.
The lending growth, however, is still likely to remain weak, at least in the short term, as banks will prioritise asset resolution and provisioning over expansion, it said.
The government’s plan to provide capital to all banks carries some risk of encouraging moral hazard, it said. “However, 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 rating agency said.
The report further said that recapitalisation bond if issued by the government could affect its target to reduce central fiscal deficit to 3.2 percent of GDP this year.
“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,” the report said.
Recapitalisation bonds would still imply contingent liabilities for the government if they are instead issued by quasi-government institutions, it said.
“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,” the report added.