Rs 22,915 cr PSB capital infusion not enough, say raters

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Mumbai | Published: July 21, 2016 6:11:35 AM

Like Fitch, ICRA too is of the opinion that the government needs to infuse much more than the `70,000 crore earmarked to help the PSBs meet Basel III requirements by FY19.

The government’s decision on Tuesday to infuse Rs 22,915 crore in 13 public sector banks (PSBs) falls well short of the requirement, rating agencies have observed. Fitch, which estimates that Indian banks would need $90 billion or over `6 lakh crore of additional capital by FY19 to meet Basel III requirements, for instance, claims that Tuesday’s capital infusion won’t be able to at all alleviate the pressure on PSBs.

“This step — on its own — is unlikely to address the pressures on the system driven by economic growth in light of the significant asset quality pressures and weak profitability prospects of these banks,” analysts at Fitch noted.

Noting that PSBs’ combined losses in the second half of FY16 were double the government’s capital injection during the year, they added that the government needs to increase the allocation amount to restore market confidence. “Fitch believes pressures on public bank credit profiles will remain, and more capital than the `70,000 crore earmarked through to FY19 will be needed from the government to restore market confidence and position the sector for long-term growth,” they observed.

According to them, one of the main reasons for the below par growth in system wide credit in recent months is the fact that PSBs’ combined losses in the last two quarters of FY16 was twice the amount infused into them by the government during the year and equivalent 15% of their capital at the end of FY15.

On similar notes, ICRA, while acknowledging that the capital infusion on Tuesday will support the capitalisation level of PSBs, noted that the amount fell short of what’s required by their estimates by anywhere between `18,000 and `28,000 crore. “ICRA estimates the PSBs tier 1 capital requirements to be in the range of `40,000- 50,000 crore for FY2017, which is higher than GoI’s current allocation of `22,915 crore equity infusion,” its analysts noted. They added that their estimates are based on the assumption that the risk weighted assets (RWAs) of PSBs would grow at 10% during FY17 and FY19.

Like Fitch, ICRA too is of the opinion that the government needs to infuse much more than the `70,000 crore earmarked to help the PSBs meet Basel III requirements by FY19.

“Given the weak share price multiples and subdued investor appetite for common equity tier 1 (CET 1) and Additional tier 1 (AT1) instruments of PSBs, the government will need to increase the quantum of capital infusion into PSBs significantly for the period of FY2017-FY2019,” Karthik Srinivasan, senior V-P and co-head, financial sector ratings, ICRA, noted.

Analysts at Deutsche Bank, on the other hand, believe that the capital infusion into PSBs on Tuesday is enough to take care of their capital requirements in the short run. “Intent seems to be to bring CET 1 ratio to near 8.5% for most banks and for SBI/BoB to be over 10%, which should encourage banks to start lending. Capital position now appears comfortable, though more capital would be required to support credit growth over time,” they noted.

After an extensive asset quality review (AQR) conducted by the Reserve Bank of India (RBI) in mid-2015, the central bank directed banks to come clean on stressed assets and make adequate provisions for them. This resulted in the total gross non performing assets of state-owned lenders shooting up to `5.4 lakh crore at the end of March, 2016 and necessitated them to provide an amount of `1.6 lakh crore for stressed assets as also ’emerging stress’. Hence, the capitalisation levels of PSBs have dipped, forcing them to go slow on fresh lending, thereby pulling down the growth of the credit in the economy.

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