"A longer time-frame is needed for the credit profiles of public-sector banks to improve, because their asset quality is tied to the slow, multi-year recovery of corporate balance sheets and the lagging recognition of associated credit costs," Moody's Vice President & Senior Credit Officer Srikanth Vadlamani said in a report.

The overall debt servicing metrics of Indian corporates are weak, which exhibit very high debt levels and will require years to improve, he said.
    
Improvement in credit profiles of Indian public-sector banks, which account for more than 70 percent of total banking system assets in India, will be achieved only in medium-term, given their high levels of impaired loans and weak capital positions, the report said.
    
"The improvement in the asset quality of Indian public sector banks for the fiscal year ended March 31 was marginal and much weaker than we had expected at the start of the same year," said Vadlamani.

While asset sales and fresh capital raising activities increased in the fiscal year, the developments have not meaningfully lowered debt levels among Indian corporates, he added further. PSU banks will need significant capital over the next few years, though their internal capital generation capacity is weak and access to equity markets has been difficult.
    
Given low capital levels of public sector banks as a whole, the government's selective approach to capital infusion will put further negative pressure on the credit profiles of weaker banks, said the report.

In its capital infusion plan for PSU banks in February this year, government only allocated funds to a few selected profitable banks, while excluding the weaker banks.
    
On new corporate governance approach by bifurcating duties between chairpersons and chief executive officers at PSU banks, Vadlamani said these moves are credit positive and much more will be required to address structural governance issues.
    
Touching upon modifications in India's framework for corporate bankruptcy, he said that the proposed introduction of a new bankruptcy law is credit positive if implemented as recommended because the current weak framework is a major impediment in the banks' enforcement of creditor rights.

"Poor implementation of such bankruptcy regimes in past was due to institutional capacity issues and unless such issues are addressed, the weak mechanisms for the resolution of stressed corporates will remain a structural weakness within the Indian banking system," said Vadlamani.

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