MOODY’S PREDICTIONS ON PSU CAPITAL

MOODY’S PREDICTIONS ON PSU CAPITAL

CAPITAL INFUSION

It is well known that the PSU banks have been under severe capital crunch.  Moody’s Investor Services have on Thursday divulged that the only possibility of revival of the PSU Banks.

Moody’s Investor Service

Moody’s Investors Service is a leading provider of credit ratings, research, and risk analysis.  Moody’s commitment and expertise reveals about transparent and integrated financial markets, protecting the integrity of credit.  Their ratings and analysis are covered over 130 countries and 11,000 Corporates and 21,000 Finance Issuers.

Moody’s Investors’ service has revealed that the banking system would require 95,000 crore of equity capital, out of which PSU Banks accounted for 70%.  Let us see as to what the real reasons are:

  • Moody’s expects the stock of the impaired loans in Banks would swell in the coming two years, thus further reducing their profits.
  • Moody has identified 11 Public Sectors banks, which will require external equity capital ranging between Rs. 70,000 crore to Rs. 95,000 crore which is the only solution.
  • The GOI had promised infusing Rs. 10,000 under the Indradhanush Plan, to each bank this financial year and next year.
  • Barring SBI, all other banks show a price to book value below one, which means it is difficult for them to raise capital from the market.
  • Also, Moody adds that smaller PSU Banks also find it difficult to raise capital through markets due to the high pressure on their asset quality.
  • It is also said that after issues related to 40 to 50 large stressed accounts are sorted out, banks who are members of consortium would be required to go for haircuts and keep necessary reserves in line thereof, which means, profit erosion.
  • Moody also says that the Gross NPAs which was 9.5% at the March end, would go up to Rs. 10% by March 2018.

OTHER LACUNA

  • Icra Ltd, an affiliate of Moody’s adds that the ordinance proposed recently for tackling NPAs is a positive note for the banks, but would fail due to banks’ low profits and non- availability of capital which means, the haircut suggested by the committee would be difficult to accept.

GENERAL

  • IDBI Bank has plans to sell Rs. 5000 crore of non-core assets during 2017-18 which in turn is hampered due to involvement of bilateral deals, and would be difficult for a state owned bank.
  • Smaller banks will be merged with larger banks initially, and then the banks would think of raising their capital.
  • Also it is learnt that SBI, BOB and IDBI Bank have plans to raise Rs. 58,000 crore through dilution of equity during 2017-18, to meet capital adequacy norms and cleaning up of their balance sheets.

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