Ratings of public sector banks (PSBs) could face pressure if the Union Budget 2016-17, to be presented next week, does not increase the amount of capital the government plans to infuse in them, Moody's Investors Service cautioned today.
Front-ending of provisioning for non performing loans (NPLs) requires a boost in capital levels of PSBs, it said.
"Consequently, unless the government revises upwards its capital infusion plan for the banks in its upcoming budget, the banks will see negative pressure on their credit profiles," said Srikanth Vadlamani, Moody's V-P and Senior Credit Officer.
Moody's rates 11 state-owned banks in India.
It estimates these banks' external capital requirements at Rs 1.45 lakh for the four financial years, ending March 31, 2019.
"While the reported NPLs of the 11 public sector banks that we rate registered a significant 0.9-4.1 percent increase in the most recent quarter ended December 2015, Moody's view of the true underlying asset quality of these banks has remain unchanged," Vadlamani said.
The increase in NPLs was because of the recognition of stress in a few large accounts as well as slippages from restructured accounts, he said, adding that both of these trends have been factored into Moody's view on the banks' asset quality.
The banks' enhanced NPL recognition in the quarter ended December 2015 was spurred by the RBI directive to recognise specific accounts as NPLs.
Despite this push, Moody's said, some large corporate exposures with weak financial metrics could continue to remain as standard assets on the banks' books.
The estimate of Rs 1.45 lakh crore capital need factors in the full extent of the asset quality issues that the banks are facing, and not just the extent of impaired loans that have been recognised so far.
"However, there would be a significant front ending of capital requirements now," it said, adding that PSU are unlikely to gain access to the capital markets for equity capital in the near term given their low valuations.
"The banks will therefore have to turn to the government for accelerated capital injections over the next 18 months," Moody's said.
Government has plans to infuse Rs 70,000 crore in PSBs over four years ending March 2019. Of this Rs 25,000 crore each would come in 2015-16 and 2016-17. Infusion of Rs 10,000 crore for each of 2017-18 and 2018-19 fiscals.
The capital infusion roadmap indicates that the overall capital requirements of the banks over the four-year period would total Rs 1.85 lakh crore.
The government expected that these banks would be able to tap into the capital markets for their remaining capital requirements, although at a later date, when the capital raising environment is more conducive, Moody's said.
"However, with heightened capital requirements in the near term, the key assumptions of this roadmap may no longer be valid," it added.
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