Indian Government Plan to Recapitalise Public-Sector Banks Is Credit Positive, Says Moody’s

In last week’s announcement of the Indian budget for the fiscal year ending March 2011, the Indian finance minister Pranab Mukherjee said that INR165bn (US$3.6bn) will be used to ensure that public sector banks (PSBs) are able to attain minimum 8% Tier 1 capital by March 2011. Moreover, an additional INR12bn (US$260m) of new capital is currently being infused into PSBs; these are already close to their 51% minimum government-shareholding requirement.

Moody’s believes that the announcement is credit positive for PSBs. The budget announcement and the willingness of the Indian government to support its PSBs reaffirms the long-held belief of Moodys that India is committed to its government majority-owned banks and will continue to infuse fresh capital into them to facilitate their growth and to maintain government control.

By statute, PSBs’ government shareholding cannot fall below 51%, and there are no plans by Indian authorities to change this law. The funds to be infused into the Indian PSBs originate mainly from a US$2bn loan approved by the World Bank for this purpose.

Recapitalising some of these PSBs appears to be a one-way road for the government, given the banks’ need for fresh equity. Most rated PSBs have already diluted their government shareholding significantly by raising new capital through initial public offerings (IPOs) over the last few years. This is no longer an option, however, in light of the not-so-favourable equity market conditions and the government’s shareholding minimum.

Over the short- to medium-term, PSBs are likely to be adequately capitalised, thus providing them with financial flexibility to implement future growth plans in a relatively underbanked market. The capital infusion will also allow PSBs to meet any possible more stringent regulatory requirements.


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