The first tranche of recapitalisation bonds will benefit larger and healthier state-owned bank, leaving lenders under the corrective action framework with just enough to maintain minimum capital requirements.
Government officials have indicated that recapitalisation will be aimed at supporting lending growth, Fitch Ratings said in a report released today. That may leave banks currently in the Reserve Bank of India’s prompt corrective action framework with “no more than the capital necessary to ensure they do not breach minimum regulatory capital requirements,” Fitch Ratings added.
The PCA framework allows the central bank to take a more interventionist approach – often through restricting asset growth. Eleven of India’s 21 state banks, including most small- and mid-sized banks, are in PCA.
The government recently received parliamentary approval to issue Rs 80,000 crore of recapitalisation bonds in the first tranche and expects to sell these bonds before the fiscal year ends March 31.
The capital injection is expected to help some of the larger banks to pursue stronger expansion, more so, if the improvement in financials helps them raise funds in the equity market, according to the international rating agency.
However, narrowing down the recipients of the capital will not necessarily mean that credit growth will improve significantly. According to Fitch Ratings, even at healthier banks, much of this capital infusion will be used to absorb losses coming from hair cuts they will have to take on bad loans.
The recent decision by Indian Overseas Bank to set off operational losses against share premium reserves – part of its capital reserves – instead of revenue reserves illustrates the difficulties faced by some undercapitalised banks as they try to avoid skipping coupon payments on loss-absorbing instruments. Fitch estimates that IOB would not have met the pre-requisite of positive distributable reserves for paying its coupon due in February 2018 if it had not dipped into capital reserves. Fitch Ratings Report On Bank Recapitalisation
IOB may set a precedent for other weak banks to clean up their balance sheets in the same way, Fitch said. “The RBI’s apparent decision not to block the move also adds to the series of regulatory forbearance that has helped avoid the risk of failed coupon payment in the previous few years.”
“Some small, weaker banks are still likely to fall into the government’s consolidation agenda, despite support from fresh capital and regulatory forbearance,” the rating agency said.
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