Limited availability of growth capital for public sector banks (PSBs) could pull down their loan growth trajectories to a CAGR of 9% during FY16-FY19, India Ratings and Research (Ind-Ra) said in a report on Wednesday.
The rating agency also said that while the same for mid-sized PSBs could be even lower at 8.1%, some might actually witness a decline in their loan book. “This growth is the bare minimum needed to generate sufficient spreads that can absorb Ind-Ra’s expected operating and credit costs over this period,” it noted.
According to Ind-Ra, non-performing assets (NPAs) would keep the credit costs for PSBs at elevated levels of 170-180 bps in FY17, thereby continuing to pressurise profitability. It, however, expects fresh slippages from large corporate accounts to come down during FY17 and FY18.
“The AQR exercise has ensured recognition of impaired loans and higher provisioning for cyclical sectors in deep stress, such as iron & steel, and a large proportion of stressed corporates that are yet to be provided for now belong to the infrastructure sector,” the rating agency noted.
According to Ind-Ra’s estimates, even this projected growth would require a Tier-1 capital of `1.2 lakh crore over FY17-FY19, including `40,000 crore common equity tier 1 (CET 1) and `70,000 crore of additional tier 1 AT1) bonds.
“The need for a pick-up in AT1 market remains critical to managing the capital availability through the Basel-III transition. A mere `18,000 crore of AT1 bonds have been issued so far, with insurance and pension funds, which have the requisite liability profile and risk appetite to invest in these instruments, keeping away on account of regulatory hurdles and inadequate price discovery,” it cautioned.