Mumbai: The government's decision to infuse a mere Rs 11,200 crore in public sector banks in FY'15 is credit negative as the amount will not help banks meet a minimum Tier I ratio of 8 percent under Basel-III norms, international rating agency Moody's said Friday.
"The allocation (of Rs 11,200 crore) is credit negative for public-sector banks because it is much smaller than Rs 25,000-36,000 crore (USD 4.1-5.8 billion) that we estimated the banks needed to meet a minimum Tier 1 ratio of 8 percent in the fiscal year ending March 2015," it said in a report.
In his interim Budget presented on Monday, Finance Minister P Chidambaram proposed to infuse Rs 11,200 crore in PSU banks to enhance their capital in the next fiscal.
Moody's said the Budget allocation is also smaller than the amount the Government has injected into public sector banks in the past three fiscal years.
The Centre infused Rs 14,000 crore in the state-run lenders in this fiscal. In FY12, it had pumped in Rs 17,000 crore, while in FY13 the amount stood at Rs 12,500 crore.
"Public sector banks' need for significant external capital is a result of an increase in non-performing loans (NPLs) owing to slowing economy and infrastructure bottlenecks , and profitability that is insufficient for internal capital generation to fund loan growth," the report said.
As of December 2013, rated Government banks reported an average gross NPL ratio of 4.3 percent, up from 3.4 percent in March 2013, and Moody's expects them to continue rising in FY15.
The report highlighted that the 90 basis points increase in the March-December 2013 period in NPL exceeds the average increase of 50 basis points for the fiscal year ended March 2013 and 78 basis points for FY12.
As a result of rising NPLs and lower profitability, provision expense rose to 65 percent of rated PSU banks' pre- -provision income for the first three quarters of the fiscal year from 49 percent a year earlier, it said.
"Another reason public sector banks require external capital is that we expect loan growth rates to remain similar to the 16 per cent Y-o-Y average recorded as of December 2013," the report said.
Moreover, the introduction of Basel III norm raises the amount of capital that banks will need to meet minimum targets, it said.
Banks on average reported Tier I ratios under Basel III that are 34 basis points lower than under Basel II in fiscal 2014, the report said.
Moody's said although State Bank of India successfully raised equity (Rs 8,032 crore) from markets last month, it finalised the transaction at a lower price and volume than it originally targeted.
The country's largest lender sold 5.13 crore shares at an average price Rs 1,565 apiece, which was the lower side of the price band it had set.
"Most other public sector banks trade at valuations below SBI, indicating that markets are not yet receptive to further equity offerings from these banks," the report said.
There are also caps on the equity exposure of Life Insurance Corporation of India that provided Rs 7,560 crore of equity to rated PSU banks in FY12.
First Published: Friday, February 21, 2014, 21:20