Moody's Investors Service, a global rating agency, has said that the gap between the capital profiles of Indian public and private sector banks is expected to narrow following the government's announced INR 2.1 trillion ($32 billion) recapitalization plan for the public sector banks, which are financially the weaker entities. Moody's Indian affiliate ICRA says that the pace of fresh NPA generation continues to moderate with an annualized rate of 3.9 per cent for Q2 FY2018 against an annualized 5 per cent for H1 FY2018 and 5.5 per cent for FY2017.
Moreover, Moody's Indian affiliate ICRA says the deterioration in asset quality -- in terms of gross non-performing assets (GNPAs) -- may peak by FY2018, but elevated levels of provisioning on these NPAs will continue to negatively affect the banks during FY2018 and FY2019. Moody's says the public sector banks' weak capitalization profile is their key credit weakness when compared to their peers in the private sector. As of September 2017, the average common equity tier 1 (CET1) ratio of rated public sector banks was 8.7 per cent compared to 12.2 per cent for the rated private sector banks. However, the gap is expected to narrow, given the government's recapitalization package.
According to its 24 October 2017 announcement, the amount totals INR 2.1 trillion ($32 billion), of which INR 1.5 trillion ($23 billion) will come from the injection of public funds from the government's existing budget and the issuance of recapitalization bonds. While details on capital allocations to individual banks are lacking at this stage from a top-down perspective, Moody's expects the government will allocate the INR1.5 trillion in capital across the country's 21 public sector banks so that they will all have common equity tier 1 (CET1) ratios above the minimum Basel III requirement of 8 per cent by the end of March 2019, which is the end of fiscal 2019.
"The capital infusion will also help public sector banks build their provisioning coverage ratios as they will be able to allocate much of their operating profits towards loan-loss provisioning without having to worry about the impact on their capital positions," says Alka Anbarasu, a Moody's Vice President and Senior Analyst. "As such, Moody's expects the rated banks will achieve an average provision coverage of 70% by fiscal 2019, allowing them to take appropriate haircuts on problem assets. Such haircuts reflect one step in the regulator's efforts towards a thorough clean-up of balance sheets across these banks," says Anbarasu. Moody's notes significant scope for the government to reduce its current shareholdings in these banks and also maintain majority ownership.