The government's decision to infuse fresh capital in public-sector banks (PSBs) will ease the rating pressure that they face because of the quality of loans, says the economic intelligence arm of global rating agency Moody's.
"Asset quality at PSBs (public-sector banks) is bound to deteriorate over the short-to-medium term, while the level of restructured loans is also expected to increase significantly, therefore elevating their credit risk profile," said Nondas Nicolaides, vice president and senior analyst at Moody's.com in a statement Monday.
"Any commitment by the Indian government to recapitalise PSBs is welcome from a creditor's, and thus, rating's perspective," Nicolaides added.
"Considering the relatively high loan growth rates recorded by these banks in the last few years, we believe that the need for new capital in PSBs is vital in the context of India's challenging credit environment," it added.
The government, which is required to hold at least 51 percent in the public sector banks, has over the past few years been gradually diluted its stake in various institutions.
Noting this, Moody's said: "Many PSBs are close to their government stake threshold, with limited leeway to raise fresh equity through the capital markets."
It said fresh capital infusion will increase the banks' tier-1 capital that will support future loan expansion, and also enhance their loss absorption capacity.
"During the current difficult market conditions, we consider a bank's equity buffer to be an important rating driver, as strongly capitalised banks can sustain possible loan losses stemming from an adverse credit cycle," Moody's said.