India Ratings, an affiliate of Fitch, has retained its ‘negative’ outlook on mid-sized and smaller state-run banks due to limited access to capital and large non-performing assets.
Rating agency Indian Ratings and Research said on Wednesday that it has maintained ‘stable’ outlook on large public sector banks and private sector banks, which high capital support, even as it projected the fresh capital requirement of the sector at Rs 91,000 crore through the next two years to meet its minimum growth needs.
“We expect large public sector banks with better access to capital and private sector banks with their robust capitalisation to navigate another year of low growth and high credit costs with a stable outlook,” India Ratings said at the release of its report on ‘Indian Banks Outlook for FY18’.
However, India Ratings, affiliate of Fitch, retained its ‘negative’ outlook on mid-sized and smaller state-run banks due to limited access to capital and large non-performing assets.
You may also like to watch:
“These banks will find it increasingly difficult to grow given increasing capital requirements and large funding gaps impeding their ability to compete on spreads,” India Ratings’ analyst Abhishek Bhattacharya said.
“There is an increasing divide between the large and smaller PSBs (public sector banks), with the former having some access to growth capital, better market valuation, and also some non-core assets to divest, while the latter would only receive bailout capital if required,” the rating agency said, adding, that the small state-run banks would need to ration their capital consumption over next two years.
Banks in India would need Rs 91,000 crore in fresh tier-I capital till March 2019 to grow at a bare minimum CAGR of 8-9%, India Ratings said. The total capital would include Rs 50,000 crore to be raised from additional Tier-1 bonds, and another Rs 20,000 crore residual tranches from the government’s Indradhanush programme, it added.
India Ratings expects banks’ impaired assets to peak at 12.5-13% by the next two financial year 2017-18 and 2018-19, which it projects to be at 12% by the end of the current financial year 2016-17.
While sectors such as iron and steel and textiles have seen a fair bit of recognition, India Ratings said the provisioning might still not be adequate to protect against defaults.
You may also like to watch:
Significant proportion of unrecognised stress pertains to sectors such as infrastructure, realty and capital goods, India Ratings said, adding that these sectors have long-term viable assets but increasingly need cash flow restructuring to avoid slippages as alternate refinancing is scarce.
The report expects the sector’s net interest margins (NIMs) to remain stable at 2.9% for the financial year 2017-18, 15-20 basis points lower than the long-term average. It estimates demonetisation impact to benefit CASA ratio of state-run banks by 200-250 basis points by March 2017 compared to that a year ago.
The rating agency also maintained a ‘stable’ outlook on the non-bank finance companies (NBFC) for the financial year 2017-18.