Extension of Basel-3 implementation timeline credit-negative for PSU banks: Moody's

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Mumbai, Nov 20 (IANS) Global credit ratings agency Moody's Investors Service on Tuesday termed the RBI board's decision to extend the timeline for the full implementation of Basel 3 guidelines by a year as a credit-negative for state-run banks.

The assessment by the research and risk analysis firm comes a day after the Reserve Bank of India (RBI) board held a meeting here that lasted over 9 hours to discuss the liquidity crisis that had triggered a tiff between the government and the central bank last month.

On Monday, the RBI board decided to retain commercial banks' capital to risk weighted assets ratio (CRAR) at 9 per cent but agreed to extend the period for implementing the last tranche of 0.625 per cent under the Capital Conservation Buffer (CCB), by one year.

On the CRAR issue, the government maintains that the capital norm for Indian banks at 9 per cent are much higher than that prevailing for banks overseas.

"It was our expectation that all public sector banks would have a core equity 'tier 1' (CET1) ratio of at least 8 per cent by the end of March 2019, based on the government's commitment that it would capitalise all these banks to a level sufficient to meet the minimum regulatory capital norms," Srikanth Vadlamani, Vice President, Financial Institutions Group, Moody's Investors Service, said in a statement.

"With the regulatory timelines now extended, it may be a case that at least some of the rated public sector banks' CET1 ratios over the next 12 months would be lower than what we currently expect."

Furthermore, Moody's said that it expects an impact on banks emanating from the board's advice to RBI on a scheme for the restructuring of the stressed standard assets of MSME (Micro, Small and Medium Enterprises) borrowers with aggregate credit facilities of up to Rs 25 crore as "necessary for ensuring financial stability".

"While more details are awaited, this approach has the potential for negative implications for the credit profiles of Indian banks," Vadlamani said.

"The track record of such dispensations on asset classification, when seen over the last few years in India, has shown that they have largely been unsuccessful in addressing the underlying stress."

"On the contrary, keeping stressed loans in the standard category has led to an underestimation of the extent of underlying asset quality issues by bank managements, and consequently the severity of the actions that they need to take to address the issue."

Besides, the RBI board had decided to form an expert committee to examine the economic capital framework of the central bank, which will decide the amount of reserves it can maintain, handing over the balance to the government.

The board also considered other issues related to the liquidity crunch in the economy and decided that the matter of relaxing the Prompt Corrective Action (PCA) norms to clean up the balance sheet of banks burdened with bad loans will be looked into by RBI's Board for Financial Supervision (BFS).

Eleven of the 21 state-run banks are under the PCA framework. The non-performing assets (NPAs), or bad loans, accumulated in the Indian banking system have touched a staggering Rs 10 lakh crore.

--IANS

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