Covid-19 crisis: ‘Indian banks need $20 billion in fresh capital’

By: |
May 28, 2020 6:15 AM

Credit Suisse expects public sector banks to dial the government for $13 billion in recap. Rising risk aversion and accelerating rating downgrades are expected to add to asset quality stress for banks.

Rising risk aversion and accelerating rating downgrades are expected to add to banks’ asset quality stress, the report said.Rising risk aversion and accelerating rating downgrades are expected to add to banks’ asset quality stress, the report said.

Hit by the pandemic, Indian banks will need $20-billion additional capital to tide over asset-quality issues, Credit Suisse said in a report on Wednesday.

The investment bank also raised its credit cost estimates by 20-60% in view of the lockdown and the extension of another three months’ moratorium granted by the Reserve Bank of India (RBI).

Credit Suisse expects public sector banks to dial the government for $13 billion in recap. Rising risk aversion and accelerating rating downgrades are expected to add to asset quality stress for banks.

Private banks’ tier 1 capital ratio is healthy at 13% and, coupled with their strong pre-provision profitability, it is adequate to absorb up to 4% additional credit cost. “However, with ~30% of retail loans under moratorium and 20-40% of corporate book ‘BBB’ or below where refinance risk has gone up, we expect them to shore up capital buffers and estimate $20 billion of capital raising by Indian banks,” Credit Suisse said.

State Bank of India’s (SBI) stake sale in its insurance subsidiaries to 30% can cover 50% of its capital call and for ICICI Bank, this is 2x of capital needed, Credit Suisse said, adding, “We expect PSUs to need ~US$13 billion recap from the government.”

Rising risk aversion and accelerating rating downgrades are expected to add to banks’ asset quality stress, the report said. “We estimate Rs 2.5 trillion of debt is already downgraded to ratings that are likely to make refinancing challenging,” Credit Suisse said.

These ‘fallen angels’ have ~Rs 220 billion of bond repayments due over the next 12 months,” Credit Suisse analysts said in the report.

Despite growing liquidity, banks have turned increasingly risk-averse and over the past 12 months, over 90% of their incremental lending has been only to corporates rated higher than A. The bond market apathy to lower-rated papers has also spiked, with funds with an over 20% share of A and below-rated debt seeing outflows of 20-60% of assets under management (AUM) in the past few months, the report said.

The challenges are not restricted to banks alone. Asset liability management (ALM) challenges for non-banking financial companies (NBFCs) are turning more severe with access to funding differentiated and a six-month moratorium on 30-70% of loans. Securitisation and the external commercial borrowing (ECB) market that was a large source of liquidity in the past 18 months have also now dried up and balance sheet liquidity is key to avoid default. “We estimate that 70% of the Indian financial system’s lending capacity is now constrained,” Credit Suisse said, adding, “PSU banks (ex-SBI) are 25% of system credit and are still to emerge from NPA issues, and now in the midst of mergers. NBFCs (22% of credit) and small private banks (8%) are also pulling back given their rising liquidity constraints. Further, ECBs (5%) and bond markets (10%) are shut, particularly for borrowers with falling ratings.”

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1ICICI Bank shuts down operations in Sri Lanka
2Risk averse banks continue to lend with caution; bank credit up marginally, deposit growth stable
3Centre’s Diwali gift: Waives interest on interest for all loans up to Rs 2 crore; check details