The Reserve Bank of India's decision to allow lenders more time to adhere to additional capital buffer norms under Basel 3 is credit negative for the country's state-run banks, Moody's Investors Service said in a release on Tuesday.
The RBI after a nine-hour marathon board meeting announced late Monday that it has extended the timeline for Indian banks to set aside an additional 0.625 percent as capital conservation buffer by one year to March 31, 2020 to help banks to lend more.
The decision came after persistent demand from top government officials and one independent director to ease lending and capital rules for banks, provide more liquidity to the shadow banking sector, support lending to small businesses and let the government use more of the RBI's surplus reserves to boost the economy.
"The decision to extend the timeline for the full implementation of Basel 3 guidelines by a year is a credit negative for Indian public sector banks," said Srikanth Vadlamani, vice president, financial institutions group at Moody's Investors Service.
The common equity Tier 1 ratio or core capital "over the next 12 months would be lower than what we currently expect" for some banks, Vadlamani added.
He also raised concerns over the central bank considering to give banks a leeway in classifying stressed assets of small borrowers which will ease the credit flow to this sector.
"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," he added.
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