Several small and mid-size public sector banks (PSBs) are expected to face capital adequacy trouble in the near future as bad loans surge and profits fall.
Fitch Ratings on Tuesday said United Bank of India was at risk of becoming the first lender in Asia to breach the minimal capital ratios mandated by Basel-III norms. In the December quarter, United Bank posted a net loss of Rs 1,238.08 crore. The bank’s net worth declined and its capital adequacy ratio (CAR) fell to a little over 9%. As per Basel-III norms, banks must maintain a total capital ratio (tier-1 capital and tier-2 capital) of 9%.
Analysts feel that smaller banks with loan books that are less diversified than their larger peers tend to suffer more when the particular sector to which they have extended credit is hit.
Another bank that could face stress if the situation does not improve could be Dhanlaxmi Bank with a total CAR of 9.7% at the end of the December quarter.
In the same quarter, Dhanlaxmi Bank reported a net loss of Rs 119 crore. Meanwhile, net NPAs as a percentage of net worth are rising at several banks. For instance, Central Bank’s net NPA ratio stood at 3.69% in the December quarter and its net NPA as a percentage of its net worth at the end of Q3 was 52.6%. For 20 PSBs, the net NPA as proportion of its net worth was around 28%. ?Going by our current rate of growth, we would require capital infusion of Rs 2,000 crore next financial year. We will also look at a preferential share issue to raise money. The rest will come from internal accruals,? said a Central Bank official said.
According to analysts, Kolkata-based Allahabad Bank could also face capital issues, with the RBI initiating a special audit of the bank’s potential NPAs.
Allahabad Bank’s tier-1 capital ratio stood at 7.94% and its net NPA ratio was 4.19% in Q3. The public sector lender’s net NPA as a percentage of its net worth stood at 53.6% in the third quarter.
Shubhalakshmi Panse, CMD, Allahabad Bank, said the lender will need to raise capital through QIP even after a recent government infusion of Rs 400 crore.
?We will be looking at a QIP because credit growth has been pretty muted. Next year, we have to move ahead and boost credit, which will push up our risk-weighted assets. And when the risk-weighted assets rise, obviously, we will require higher capital,? Panse said in a call with analysts.
Fitch has highlighted a more systemic problem on capital adequacy, saying the RBI has not clearly defined the point of non-viability under Basel-III. The report said that should tier-1 capital fall below 6.125%, the bank’s risk of hitting non-viability increases.
Shayan Ghosh