PSU bank recap part 2: Modi govt’s move may not support long term growth; Fitch explains why

bank credit, scheduled commercial banks, Non-food credit, RBI, bank deposit, market news

Earlier in February, the government announced infusion of  Rs 48,239 crore in 12 public sector banks (PSBs) in FY19.

Modi government’s recent decision to increase capital infusion may have given a short-term reprieve to the PSU banks, the move is not expected to support their growth in the long-term, on account of ongoing provisioning and their tepid earnings outlook, a report said.

“The banking sector’s weak earnings, in particular state-owned banks, and thin capital buffers remain at risk from ageing provisions, which stem from the slow resolution of the sector’s USD150 billion NPL stock (FY18)”, Fitch Ratings said.

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Earlier in February, the government announced infusion of  Rs 48,239 crore in 12 public sector banks (PSBs) in FY19 to help them maintain regulatory capital requirements and finance growth plans. With this funding, the total amount of capital infusion increased to Rs 1,00,958 crore of the planned recapitalisation of Rs 1.06 lakh crore for PSBs for the current fiscal.

The report also said that the lower slippages and improved recoveries have reduced the gross non-performing loan (NPL) ratio of the banking sector in the first nine months of the running fiscal. However, slow resolution of bad loans and weak capital are expected to keep the recovery slow, a report by Fitch Ratings also said. The NPL ratio has come down in 9MFY19 to 10.8 per cent from 11.5 per cent in FY18, it noted.

“Overall credit costs, despite a decline in percentage terms from previous years, remained high compared with most state banks’ weak pre-provision profits. As a result, several state banks reported losses in 9MFY19 while the common equity Tier 1 for nearly half of the 21 state banks was below the minimum 8% required by FY20,” it noted.

The report also said that the RBI’s recent decision to delay implementation of IndAS for the banks for the second straight time “underscores some of the near-term challenges and reflects the authorities’ aversion to compound the sector’s weak financials”.

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