Global rating agency Moody’s on Thursday said that India’s economic recovery reduces the risk of a sharp deterioration in public sector banks’ (PSBs) mildly improving asset quality.
However, the capital shortfalls will remain despite a likely government equity infusion and this makes banks vulnerable to unexpected shocks and restricting credit growth.
“Various measures by the government to support borrowers have helped curb growth in public sector banks’ non-performing loans (NPLs), and the volume of restructured loans is not as large as we anticipated,” said Rebaca Tan, a Moody’s assistant vice president and analyst.
Asset quality at the five largest rated PSBs in India – State Bank of India , Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India – improved mildly in the first 9 months FY21 despite an economic contraction exacerbated by the Coronavirus (Covid-19) pandemic.
The gross non-performing assets (NPAs) ratios of the 5 banks declined by an average of about 100 basis points at the end of CY2020 from a year earlier. This is so even after including loans that have become delinquent since the end of August 2020, but are not formally classified as NPAs because of a pending case in the Supreme Court.
However, India’s PSBs will continue to face capital shortages as their profitability remains weak given high credit costs, leaving them vulnerable to any unexpected stress. The government plans to infuse Rs 20,000 cr0re in equity capital into public sector banks in fiscal 2022, on top of the Rs 20,000 crore budgeted in FY21.
“While the government’s capital infusion into public sector banks will help them meet Basel capital requirements, it will not boost credit growth,” added Tan.
Early this week, the rating agency, in a commentry on private banks’ in India, had said economic recovery will support borrowers after the expiry of government support measures, which have slowed growth in private-sector banks’ NPLs.
Banks can absorb unexpected losses, while strong deposit growth boosts liquidity and helps reduce funding costs.
Ample domestic liquidity, loose monetary policy, moratoriums on loan repayments and government-guaranteed loans to small businesses have supported Indian banks’ asset quality. As a result, restructured loans have not increased as much as expected at the onset of the Covid-19 pandemic, Moody’s had said.