The top 11 Indian public sector banks, including the country’s largest lender, State Bank of India, will need external equity capital of about Rs 70,000-95,000 crore over the next two years, Moody’s Investor Service, wholly owned credit rating agency subsidiary of Moody’s, said on Thursday. The capital requirement is substantially higher than than the remaining Rs 20,000 crore budgeted by the government towards capital infusion until March 2019. “Weak capitalisation levels will remain a key credit weakness for Moody’s-rated Indian public-sector banks, particularly in the context of the increasing requirements for equity under Basel III, and the limited ability of the banks to raise external capital,” Alka Anbarasu, vice-president and senior analyst at Moody’s, said. The state-run banks account for about 70% of the total banking sector business in India, and these 11 banks account for about 55-60% of the total business controlled by the state-owned lenders.
In 2015, under the Indradhanush scheme, the government had said it would infuse rs 70,000 crore in state-run banks over the next four years, while the banks would have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirement in line with global risk norms. Moody’s believes capital infusion from the government remains the only viable source of external equity capital, because of the public-sector banks’ low capital market valuations, which could deny them the option of raising fresh equity from markets.
Gross non-performing assets of Indian banks is likely to increase to Rs 8.2-8.5 lakh crore by the end of the fiscal year ending March 2018, Moody’s Indian affiliate Icra said.
You may also like to watch:
In FY17, the number stood at rs 7.65 lakh crore. There is an upside risk if there is a slower resolution of strategic debt restructuring (SDR) accounts, thereby leading to higher slippages, it added. “Because the pace of non-performing assets (NPA) resolution is sluggish, Icra’s outlook on the banks’ asset quality remains weak, even as the pace of fresh NPA generation slows,” said Karthik Srinivasan, group head of financial sector ratings, Icra. According to Icra’s estimates, fresh NPA generation in FY18 would be 4-4.5%, lower than 5.5% in FY17.
In May, the government cleared an ordinance to amend the Banking Regulation Act, giving wide-ranging legislative powers to the Reserve Bank of India to issue directions to lenders to initiate insolvency proceedings for the recovery of bad loans. While the step is positive for banks, their limited profitability and capital cushions will be a challenge for them to absorb haircuts stipulated by the committees constituted for the resolution of stressed assets, Icra said.