Global rating agency Moody’s on Tuesday said the new NPA resolution mechanism are broadly the same as the earlier moves and overlooks key constraints on capital, which makes recovery from dud loans a long-drawn affair.
“The measures do not address the lack of capital at the state-owned banks, that has prevented them from writing down non-performing loans to realistic levels. We continue to expect NPl resolution to be a relatively long drawn out process,” Moody’s said in a note. However, the agency said “these measures improve the efficacy of NPl resolution mechanisms and are a credit positive.” But it was quick to point out that “successful resolution, either by through debt relief or asset sale, will require banks to take a big hit when they write down the value of these assets to market value.
However, the state-owned banks’ weak capital levels mean that they do not have the capacity to take these sort of write-downs.” The agency further said the state-run banks will use their operating profits over the next two years to increase the provision coverage ratios, after which the process of balance sheet clean up will begin.