Global credit rating agency Moody's said Thursday that India's economic recovery reduces the risk of sharp deterioration of public sector banks (PSBs) by marginally improving asset quality.
However, capital shortfalls will remain despite the probable injection of government equity, leaving banks vulnerable to unexpected shocks and limiting credit growth.
"Various measures by the government to support borrowers have helped curb growth in public sector banks' non-performing loans (NPLs), and the volume of restructured loans is not as large as we anticipated," said Rebaca Tan, Moody's Assistant Vice President and Analyst.
Asset quality at the five largest rated PSBs in India – State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India – improved marginally during the first 9 months of FY21 amid the economic contraction aggravated by the Coronavirus (Covid-19) pandemic.
The aggregate non-performing assets (NPAs) ratios of the five banks decreased by an average of around 100 basis points from the previous year at the end of CY2020. This is valid even after the inclusion of loans that have been overdue since the end of August 2020, but are not officially listed as NPAs due to a pending case before the Supreme Court.
However, India's PSBs will continue to face capital shortages as their profitability remains weak given high credit costs, leaving them vulnerable to any unexpected stress. The government plans to infuse Rs 20,000 cr0re in equity capital into public sector banks in fiscal 2022, on top of the Rs 20,000 crore budgeted in FY21.