Moody’s Investors Service has downgraded the long-term bank deposit ratings of the Central Bank of India and Indian Overseas Bank. Moody’s has also stated that the introduction of major policies such as the Financial Resolution indicates that the extent of the support offered by the Government to some banks is lower than assumed earlier.
Moody’s Investors Service has stated that a declared intention of the entire resolution framework is to restrict the usage of public money for rescuing institutions that are distressed. As a result, the banks that are benefiting from support provided at the highest levels will see lower support over a sustained time period. Moody’s has downgraded the long-term foreign and local currency bank deposit ratings for these two banks from Ba1 to Ba3. The Indradhanush recapitalization plan according to Moody’s will only offer Rs.20,000 crore in the two fiscals till March 2019 by way of additional capital. This is short of the sum that is still needed by banks for tackling their recapitalization and solvency challenges.
According to Moody’s, the government has scaled up the capital injection as planned although the required capital has not been raised by most of the public sector banks from equity capital markets. The rated public sectors continues to be positioned by Moody’s in the very high support category and this showcases the importance of the public sector banking system in India. The Governmetn has the majority stake in these banks and is also involved visibly in their operations and management including the hiring of senior managers and also the establishment of vital indicators of performance. Moody’s added that public sector banks need to stay viable in order to maintain the overall systemic economic stability. These banks cumulatively account for close to 74% of the entire assets of the banking system in the country.
Moody’s also expects asset quality to be the thorn in the flesh for rated public sector banks as far as credit weaknesses are concerned. Moody’s has also stated that net non-performing rates of loan formation will remain elevated on the absolute basis while moderating in comparison to levels witnessed over the last two years. The Government is expected to be the major external capital source for these banks according to Moody’s.