Govt.’s PSB recapitalization plan gets positive response by credit rating agencies

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The centre’s decision of recapitalization of Public Sector Banks (PSBs) gets positive feedback by some of the credit rating agencies.

On December 20, Finance Minister Arun Jaitley announced the infusion of an additional 41,000 crores in the PSBs in the financial year 2019. 

Jaitley said more capital will take some PSBs out of the Prompt Corrective Action (PCA) framework.

Madan Sabnavis, Chief Economist, CARE Ratings, expressed that the decision to recapitalize banks is positive and will help the PCA banks, which will be able to lend more to the system.

He said, “It needs to be seen how many (banks) get out of the PCA category…The progress made in terms of (bad loans) recognition is good as has been the de-risking of bank portfolio as it improves the general health of banks. The modus operandi of recapitalizing is important. It is likely that the recapitalization bond route will be used. This will be fiscally neutral”.

Anil Gupta, VP and Sector Head of Financial Sector Ratings, ICRA, agreed with Madan and said that it is a positive step as the banks have not been able to raise the budgeted capital from markets as expected by the original recapitalization plan amounting to 2.11 lakh crores.

He said, “The additional capital infusion is higher than our expectations that the Government of India will not upsize the budgeted capital of 65,000 crores for PSBs during FY2019. Upsizing of budgeted capital to 1.05 lakh crores hence is expected to result in higher capital into some PCA banks enabling their exit from PCA,” 

Gupta added, “In our view, negative return on asset is a backward-looking criterion. If the bank has adequately provided on its NPAs and also has been capitalized, then the future earnings will improve for the bank. With improved capital position, the ability of PSBs to support credit is expected to improve and we expect the credit growth to improve with a better credit flow to MSMEs as well as to NBFCs through their portfolio buyouts by banks”.

The recapitalization, FM told on Thursday, will enhance the lending capacity of state-owned banks and help them come out of the Reserve Bank of India‘s Prompt Corrective Action (PCA) framework.

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