Mumbai: Government of India's capital investment in banks controlled by it will be sufficient only to meet regulatory needs and hence restrict their loan growth to about 4 to 5 percent. However, the requirement for capital will not grow much after fiscal 2019 as their profitability will gradually improve and credit costs will come down because of the ongoing clean up in balance sheets, global credit rating agency Moodys said in a report on Tuesday.

Moodys analysis shows that government capital injections will only be enough to enable all public sector banks to achieve Common Equity Tier 1 (CET1) ratios of at least 8% by March 2019, giving the banks a capitalization profile comparable to those of their similarly rated peers globally.

The government currently plans to provide Rs 65,000 crore of new capital for public sector banks in fiscal 2019 after infusing Rs 90,000 crore in fiscal 2018. So far this year the government has infused a total of Rs 11,300 crore to five banks namely, Punjab National Bank, Andhra Bank, Allahabad Bank, Corporation Bank and Indian Overseas bank.

The capital injections will enable the banks to strengthen their provision coverage, it may still not be sufficient if they take large write-downs on the non-performing loans (NPLs) they sell as part of new resolution proceedings. An increase in provisions could raise their capital needs significantly, Moodys said.

"The large-scale recapitalization plan, which was meant to improve capital buffers and loan-loss reserves and also support sufficiently strong loan growth, will now be just enough to shore up capital ratios above regulatory requirements because the banks' capital shortfalls have grown larger than the government's initial projection," says Alka Anbarasu, Moody's vice president and senior credit officer.

If the government wants banks to increase its loan growth to support economic expansion, it will need to increase capital support, Anbarasu added. “Although the government support will help the public sector banks build up their capital and provisioning buffers against losses, the improvements are likely to prove only temporary, barring a broader reform to fundamentally strengthen their weak underwriting practices. Without reform, the government will continue to have to inject capital into the banks when they face stress, which will strain its own finances and hinder its efforts for fiscal consolidation,” Moodys said.

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