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Complete turnaround two years away for PSBs despite capital infusion: Moody's

After the government announced Rs 48,239 crore capital infusion into 12 public sector banks (PSBs) in this fiscal to help them maintain regulatory capital requirements and finance growth plans, global rating agency Moody's Investors Service in its latest report has said that this fresh round of recapitalization of 12 PSBs is positive as it will help them improve their core capital. But, it expressed caution saying that a complete turnaround is still two years away due to the large quantum of legacy bad loans.

Moody's said the capital support to PSBs has been increased from the original plan as banks' capital shortfalls have grown larger than the initial projections. However, these banks are far from a complete turnaround as large volumes of problem-loans will still continue to cap improvements in profitability and capitalisation, constraining their credit profiles. A key hindrance to a faster turnaround of these banks is the slow progress in the resolution of legacy bad loans and the need to build up provisions against those assets.

The agency said although the resolution process at bankruptcy courts (NCLTs) has been initiated for most large NPA accounts, progress has been slower than they anticipated, and a complete cleanup of legacy problem loans could take more than two years. It said farm loan waivers, which three states have granted since November 2018, are a risk because these measures can incentives borrowers to not repay their loans, contributing to more bad loans in the agri lending books. Besides, it said vulnerabilities linger among MSMEs as reflected in the spikes in bad loans.

As per the report, the fresh capital will enable banks to use operating profit to significantly boost provisions for bad loans. It expects state-run banks' capital shortages to shrink substantially in FY20 as their asset quality improves, which will lead to declines in credit costs and gains in profitability. Moody's forecast that state-run banks will require a total of about Rs 20-25,000 crore in external capital in FY20 to maintain CET1 ratios of about 8.5%.

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