The recent capital infusion will improve solvency of banks, but not fully resolve legacy problem loans.
New Delhi: Moody's Investors Service on Thursday said the government fund requirements of public sector banks will shrink substantially to about Rs 20,000-Rs 25,000 crore in the year ending March 2020 (fiscal 2020) on improving asset quality.
The government on Wednesday announced to pump in an additional Rs 48,239 crore in 12 public sector banks (PSBs) in this fiscal to help them maintain regulatory capital requirements and finance growth plans. In the current financial year, Rs 1,00,958 crore has been infused into these banks.
"Moody's estimates that PSBs will require a total of about Rs 20,000-25,000 crore in external capital in fiscal 2020 to maintain CET-1 (common equity Tier-1) ratios of about 8.5 per cent. This is a significant reduction from the Rs 1.96 lakh crore infused by the government in the past two years," it said in a statement.
The recent capital infusion will improve solvency of banks, but not fully resolve legacy problem loans, Moody's said.
"The latest government capital infusions will improve the solvency of the banks, and significantly boost their provisions for non-performing loans. However, large volumes of legacy problem loans have yet to be resolved," it added.
Moody's Vice-President and Senior Credit Officer Alka Anbarasu said the capital infusions will help the PSBs meet regulatory capital requirements and improve provisioning coverage.
In addition, the capital infusions will lead to stronger PSBs having sufficient capital to support credit growth, with some banks able to raise capital from the equity markets as their financial improve, which will reduce the need for future capital injections from the government.
However, many weaker banks will continue to find it difficult to generate sufficient capital internally to meet their capital needs, Anbarasu said.
"We believe the government remains committed to resolving the PSBs' capital needs and will provide capital for them in fiscal 2020; although the government has not included any such plan in its annual budget for the year," Moody's said.