Public sector lenders need to raise as much as Rs 2.1 lakh crore in external capital over the next two years to tackle the capital shortages that will only be exacerbated by the coronavirus pandemic, rating agency Moody’s said.
Public sector lenders need to raise as much as Rs 2.1 lakh crore in external capital over the next two years to tackle the capital shortages that will only be exacerbated by the coronavirus pandemic, rating agency Moody’s said. Most of the capital required by the public lenders is likely to come from the government. While a large number of private sector banks have already undertaken capital raising, in an effort to tackle the headwinds that may emerge in the medium-term, their public sector counterparts are yet to do so. Moody’s said that the pandemic and the resultant lockdowns will hit the economy and in turn hurt the public sector lenders and their asset quality.
Align with the impact on asset quality, credit costs are also expected to increase sharply, hitting profitability and eroding the already weak capital buffers of the public sector banks. “We estimate PSBs will need Rs 1.9 lakh crore – Rs 2.1 lakh crore in external capital over the next two years to restore their loss absorbing buffers,” Moody’s said. Private sector lenders including ICICI Bank, Yes Bank, Kotak Mahindra Bank, Axis Bank, and IDFC First Bank have successfully raised capital over the last few months through various means.
Asset quality to deteriorate
Moody’s estimates that the economic impact of the coronavirus pandemic will have a ripple down effect and result in an increase in non-performing loans (NPL), driven by the retail and micro, small and medium enterprises (MSME) segments. Under the base case scenario of the rating agency, loans to retail borrowers and MSMEs will be affected the most, adding to the already clogged drain of corporate NPLs. “Job losses resulting from disruptions to economic activity and subsequent reductions in household income will lead to a deterioration of retail loan quality. The performance of MSME loans has already started weakening due to the economic slowdown, and deterioration will accelerate as a result of weak demand for these businesses’ products and disruptions to supply chains,” Moody’s said.
Although Moody’s noted that at the end of April 2020, about 70% of PSBs’ loans were under a loan repayment moratorium. Data from Jefferies showed that 31% of PSU Bank loans were under moratorium at the end of April, which came down to 21% in the second phase of the moratorium. Despite RBI’s efforts, Moody’s said that NPL ratio will increase to about 14.5% by the end of March 2022 from 11% at the end of March 2020.
The government did infuse almost Rs 2.7 lakh crore between fiscal 2017-2020 but the pandemic might force the government to infuse more capital to keep public lenders healthy. Almost half of this, the rating agency said, will be needed by banks to build up loan-loss provisions to about 70% of NPLs. Which will then leave them with enough capacity to grow loans 8%-10% annually. Public lenders with higher exposure to retail and SMEs are Canara Bank, Indian Overseas Bank, and Central Bank of India, are expected to face greater external capital requirements than corporate-focused banks. However, if the economic impact is prolonged and things go awry capital infusion requirements may inch up to Rs 3.4 lakh crore.
Government to provide support
Similar to the past, the government is expected to step up and help these banks with their extra capital requirements. However, the government has not yet announced any measures to infuse capital so far. Jefferies in a note earlier this month too said that public sector banks are expected to fund their capital requirement from the government. According to Jefferies, public sector banks are looking to raise $5 billion.