Moody's says PSU banks will have to raise funds from capital market if Budget 2015 doesn't help

PSU banks will have to raise funds from the capital market to meet capital requirement norms in absence of adequate financial support from the government in the forthcoming Budget, rating agency Moody's said on Monday.

For the current fiscal, the government has earmarked Rs 11,200 crore for capital infusion in state-owned banks. Of that the government has said it will soon infuse Rs 6,990 crore in nine banks including SBI, Bank of Baroda (BoB) and Punjab National Bank (PNB).

Unless the government materially increases the capital allocation to state-owned banks in the next budget, the only way these banks can improve their capital ratios is by accessing equity capital markets, Moody's Investors Service said.

The government in the current fiscal has adopted new criteria in which the banks which are more efficient would be rewarded with extra capital so that they can further strengthen their position.

The capital infusion has been decided based on the performance of the bank.

Better the performance higher will be the infusion. Moody's said under these new criteria, weaker PSU banks with low capital levels and less ability to generate capital internally will have to rely on external capital infusions.

"This will be challenging given that even strong state- owned banks have found it difficult to access the equity capital markets. Thus, capital infusions from the government are currently the only way for these banks to improve their capital ratios," it added.

Moody's said the change is credit negative for state-owned banks that are less profitable, including Central Bank of India, Indian Overseas Bank and IDBI Bank.

"However, PNB, BoB, State Bank of India and Syndicate Bank would benefit because they are among the more profitable state-owned banks," it added.

The new criteria mark a significant change from the earlier yardstick based on which the government allocated capital in the past. Over the past three years, banks with weaker capital levels received larger capital allocations, regardless of their size or profitability.

The new policy will benefit more profitable state-owned banks because they may now get a higher amount of capital than they previously expected.

"However, even after these capital infusion, the capital levels of these relatively more profitable banks will remain weak," Moody's said.

The government has infused Rs 58,600 crore between 2011 and 2014 in the state-owned banks.