Moody’s Investors Service says 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 trn ($32 billion) recapitalization plan for the public sector banks, which are financially the weaker entities.
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% compared to 12.2% for the rated private sector banks.
“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.