Moody’s said that the track record of such dispensations on asset classification, when seen over the last few years in India.
New Delhi: Global rating agency Moody’s Investors Service said on Tuesday that the RBI decision to allow lenders more time to adhere to additional capital buffer norms under Basel 3 is credit negative for the state-run banks.
“The decision to extend the timeline for the full implementation of Basel 3 guidelines by a year is a credit negative for Indian public sector banks,” said Srikanth Vadlamani, vice president, financial institutions group, Moody’s Investors Service.
The RBI after a nine-hour marathon board meeting announced on Monday that it has extended the timeline for the Indian banks to set aside an additional 0.625 per cent as capital conservation buffer by one year to March 31, 2020 to help banks to lend more.
“It was our expectation that all public sector banks would have a core equity tier 1 (CET1) ratio of at least eight per cent by the end of March 2019, based on the government’s commitment that it would capitalise all these banks to a level sufficient to meet the minimum regulatory capital norms,” said Mr Vadlamani.
With the regulatory timelines now extended, it may be a case that at least some of the rated public sector banks’ CET1 ratios over the next 12 months would be lower than what we currently expect, said Moody’s.
Moody’s pointed out that RBI’s board has advised that the central bank should consider a scheme for the restructuring of the stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore , subject to such conditions as are necessary for ensuring financial stability.
“While more details are awaited, this approach has the potential for negative implications for the credit profiles of Indian banks,” it said.
Moody’s said that the track record of such dispensations on asset classification, when seen over the last few years in India, has shown that they have largely been unsuccessful in addressing the underlying stress.
“Keeping stressed loans in the standard category has led to an underestimation of bad loans,” it added.