Moody's Investors Service today said the government's plan to infuse Rs 2.11 lakh crore in PSU banks is "significant credit positive" as it will help address the problem of weak capitalization.

To strengthen capital position of banks for onward lending to private sector, the government yesterday announced that an 'unprecedented' Rs 2.11 lakh crore would be infused in PSBs over two years.

"The quantum of the plan is large enough to comprehensively address these banks' weak capitalization levels and is a significant credit positive as weak capitalization is the main credit weakness for most rated public sector banks," said Srikanth Vadlamani, a Moody's Vice President, and Senior Credit Officer. Ten Banks That Have Slashed Interest Rates On Savings Bank Accounts

Of the total Rs 2.11 lakh crore, Rs 1.35 lakh crore would be in the form of recapitalisation bonds, while the rest would involve a combination of already announced budgetary support and capital raisings by the banks themselves from the capital markets. "For the 11 rated PSBs, Moody's estimates that their external capital requirements over the next two years would be around Rs 70,000-95,000 crore, factoring in the two main drivers of their capital needs - the need to comply with Basel III requirements, and for conservative recognition and provisioning of their asset quality problems," Vadlamani said.

Moody's said even if only the recapitalization bonds and the already announced budgetary support are factored in, the announced capital infusion by the government should be able to comfortably address the capital requirements of the public sector banks. The inability of most of the PSU banks to access the equity capital markets has also been a key constraint on their capital levels. With much greater visibility now on these banks receiving adequate capital from the government, they may also accordingly regain market access. Notably, there is significant scope for the government to reduce its current shareholdings in these banks and still maintain majority ownership, Moody's said.

In the past, the government had used the recapitalization bond route to recapitalize public sector banks. Moody's said those instruments typically had relatively long maturities and didn't have much market liquidity. A similar structure this time would have some negative implications for the banks' liquidity and profitability profiles.

"However, given that the overarching credit weakness of PSBs currently is their weak capitalization levels, we would see an infusion of the recapitalization bonds as a significant credit positive, notwithstanding some of these potential weaknesses in their structure," Moody's said. The US-based agency expects that all rated PSBs would get enough capital to satisfy their Basel III capital requirements as well as adequately address their asset quality challenges. "Thus, while the extent of improvement may vary, we expect the capitalization profiles of all rated PSBs to improve," Moody's added.

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