Rating firms for more bank reforms

The capital infusion into public sector banks (PSBs) will help them maintain their capital ratios, but the reform agenda of the government for banks does not emphasise on better risk management systems in banks, said rating agencies Moody's and S&P.

They say the reform road map is cosmetic in nature.

The global rating agencies believe the capital infusion is a good move, but it alone cannot be the panacea for the problems that plague the state-owned banks.

Moody's said that the reform agenda for the banks is at best only fine-tuning. "For instance, it is now envisaged that a bank's Board will monitor the bank's performance on key metrics on a more frequent basis and there should be a performance management system to incentivise and fast track good performers," said Srikanth Vadlamani, Moody's vice president and senior credit officer, in a release.

"Banks will also have to more closely monitor corporate exposures beyond a certain size." "However, some of these changes, while positive, seem to be largely fine-tuning and calibrating some core internal processes at these banks," said Vadlamani.

Rating firm S&P also believed that capital infusion will only take care of a part of the solution.

"We believe the capital infusions alone won't go far enough," said S&P Global Ratings credit analyst Deepali Seth-Chhabria. "Beyond solving the immediate balance-sheet problems, public sector banks require significant improvement in risk management practices, efficiency gains, and better overall governance to boost the health of the sector. Nevertheless, it is a good beginning."

The government said in late 2017 that it would inject a total of Rs 2.11 lakh crore into government-owned banks. Under the plan, Rs1.35 lakh crore of the total infusion will come from recapitalisation bonds and Rs 76,000 crore from budgetary support and fund-raising in the capital markets in the fiscal years ending March 31, 2018 and 2019. The latest announced plan for 2017-2018 includes Rs 80,000 crore through recapitalisation bonds and the remaining Rs 8,140 crore through budgetary allocation.

"The government has announced various reforms for public sector banks, but we currently do not believe these reforms are meaningful enough to address the structural corporate governance issues facing these entities," said Vadlamani.

However, he said the announcement is a credit positive for all public sector banks, especially the weaker ones, as the government has made it explicit that it would ensure that all such banks meet minimum regulatory capital requirements.

The bonds which will be issued by the government or a government agency will not have statutory liquidity ratio(SLR) status and hence these bonds will not quality for SLR holdings of banks. The bonds will have tenure of 10-15 years and the coupon on these bonds will be based on the average G-sec yields for last three months with some spread.

JUST FINE-TUNING

• Some of these changes seem to be largely fine-tuning and calibrating some core internal processes, Moody's said
   
• Ratings company S&P also believed that capital infusion will only take care of a part of the solution