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Selective capitalisation may impact smaller banks' growth: S&P

Last month, the government announced a Rs 6,990-crore capital infusion wherein nine better-performing lenders like SBI, Bank of Baroda, Canara Bank and Punjab National Bank were given priority in capital allocation over others.

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Global ratings agency Standard & Poor's said the government's move to selectively capitalise state-run banks is a welcome step but may impact the growth of smaller lenders who have been left out.

"In our view, incentivising efficiency is a good long term strategy, however, in the short term, it does accentuate capital constraints for some public sector banks," said Standard & Poor's Senior Director Geeta Chugh in a conference call.

"We do expect these PSBs (public sector banks) will face some challenges in terms of raising capital, particularly given the stock valuations are also poor. It is going to be a constraint for them and could potentially even limit growth for some of these banks," she said.

Last month, the government announced a Rs 6,990-crore capital infusion wherein nine better-performing lenders like SBI, Bank of Baroda, Canara Bank and Punjab National Bank were given priority in capital allocation over others.

Reserve Bank deputy governor S S Mundra had also flagged this as an issue, saying it can aggravate the troubles for those banks which have been left out.

"To my mind, at this point of time, to restrict allocation only to a few banks and to leave the other banks out... Time may not be very appropriate, that is what I feel.

To deprive them of capital at this point of time, I think, would only aggravate the problem and would also have implication on growth... Few challenges which they face at this point of time can be managed if they are able to maintain a growth momentum in coming point of time", Mundra had said.

Chugh explained that there are two kinds of support which the government provides - ongoing basis, like the re-capitalisation, and in times of stress.

"Based on our discussions with the government, we continue to believe that there is a very high likelihood that government will continue to provide extraordinary support to the PSBs if they are in a stress situation," she added.

Standard & Poor's warned that any changes in government's stance on this front may hurt banks' ratings.

"The ratings of Indian PSBs could face downward pressure if government support were to change. But at the moment, that is not our expectation," its Senior Director Geeta Chugh said.

The government's move to decrease the capital allocation to Rs 7,900 crore in FY16 will hurt the system, particularly the smaller banks, and lenders will have to look at alternatives, including hybrid instruments to buffer their capital, she said.

The asset quality woes for the banks are unlikely to end in FY16, but the pace of accretion to asset quality stress will come down in the next few quarters, she said.

The agency expects stressed assets in the system, including non-performing assets, restructured advances and security receipts, to grow up to 12% of the total by end of the next fiscal, she said.

Beyond the demand for the current round of telecom and coal auctions, capital expenditure-related loan demand will continue to be suppressed, she said, identifying corporate de-leveraging, lower lending rates and solving infra sector woes as critical factors to turn the tide.

However, credit growth for FY16 will inch up to 12% from the current 10%, largely on retail and capex demand, the agency said.

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