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Government will have to infuse Rs 1.2 lakh crore (Rs 1.2 trillion) into PSU banks by 2020 to bolster their balancesheets and make good the losses suffered by them, Moody's Investors Service said on Friday.
This is way higher than an additional Rs 45,000-crore (Rs 450-billion) capital infusion plan envisaged by the government.
Moody's said the asset quality of the banks will remain under pressure over the next 12 months and increased provisioning would constrain profitability and limit internal capital generation.
"In view of their results for the fiscal year ended March 2016, Moody's analysis suggests capital requirements of about Rs 1.2 trillion for its 11 rated public sector banks, far higher than the remaining Rs 450 billion included in the government's budget for capital distribution to the banks until 2020," it said.
The PSU banks cumulatively suffered losses of Rs 18,000 crore (Rs 180 billion) in the last fiscal mainly on account of higher provisioning for bad loans.
The government is committed to providing capital over and above the budgeted Rs 25,000 crore (Rs 250 billion) for this fiscal.
Moody's said most bank shares are trading below book value which constrains their ability to raise capital from the capital market.
The weak earnings outlook for PSBs highlights their high level of external capital needs and their capitalisation profiles will further deteriorate unless the government provides additional capital support, it added.
"Furthermore, the banks' asset quality will remain under pressure over the next 12 months as they continue to recognise non-performing loans from some of the larger leveraged corporate groups, particularly in steel and power sectors," Moody's V-P and Senior Analyst Alka Anbarasu said.
In August 2015, the government had budgeted a total of Rs 70,000 crore (Rs 700 billion) to be disbursed to the PSBs over four years.
As of end March 2016, it had already disbursed about Rs 25,000 crore of this amount.
Another Rs 10,000 crore (Rs 100 billion) has been budgeted for infusion in each of 2017-18 and 2018-19.
The asset quality review mandated by RBI in the second half of the fiscal year through March 2016, in an effort to clean up the banks' balancesheets, has hit their profitability real hard.
Nevertheless, the banks also reported improved capital levels on the back of new RBI rules that have broadened their capital base.
The rules, amended in March 2016, allow them to recognise revaluation reserves, deferred tax assets and foreign currency reserves as common equity tier 1 capital, in turn resulting in a one-off boost to the capital level.