Budget does not address immediate capital needs of banks, says Moody’s

Jul 15 2014, 12:02 IST
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SummaryThe Union Budget, announced last Thursday, has only a limited credit effect on Indian banks because it does not address their immediate challenges

The Union Budget, announced last Thursday, has only a limited credit effect on Indian banks because it does not address their immediate challenges, especially the challenge of capitalisation, ratings agency Moody's said in a report on Monday.

“The Budget fails to increase the R11,200 crore that the previous government committed to recapitalising public-sector banks for fiscal 2015. The R11,200-crore amount, which is lower than that of fiscal 2014, falls short of these banks’ high capital requirements,” Moody's said.

The report pointed out that banks need capital to support low- to mid-double-digit loan growth, comply with Basel-III regulations and improve their loan loss coverage levels, and the modest capital injection poses the risk that the banks will operate with thinner capital buffers than in fiscal 2013.

According to the ratings agency, budgetary measures to facilitate the recapitalisation of the banks will not bring real benefits until 2015 or later.

The government hinted it would look to reduce its stake in public-sector banks to no more than 51%, from the current 56%-89%.

“This measure is unlikely to have any meaningful effect in the near term because the key constraint on public-sector banks’ external capital raising has been their inability to attract fresh private capital, rather than a lack of willingness on the part of the government to reduce its stakes,” Moody's said.

On the government's proposal for increased autonomy for public sector banks with respect to their governance and strategic direction, and consolidation, Moody's said that although this is a constructive shift in policy to address the banks’ governance issues, details are lacking on how this may be implemented.

The government said it will allow banks to raise long-term funds for lending to infrastructure projects, and exempt such funds from reserve requirements. The Budget also also proposed incentives to attract long-term funds into real estate investment trusts (REIT) and infrastructure investment trusts, a modified REIT type structure for infrastructure projects.

“The infrastructure sector is currently one of the key sources of asset quality stress for Indian banks, so improvements in that sector’s financing are likely to also help banks’ asset performance,” the report explained.

It said that banks could see faster resolution of their bad loans from the proposed creation of six new debt-recovery tribunals.

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