Banks facing slump in loan growth: Ind-Ra

Limited availability of growth capital with public sector banks (PSBs) could pull down their loan growth trajectory, which in turn is likely to tighten the funding requirement for an economic pick-up, according India Ratings and Research (Ind-Ra).

The credit rating agency has estimated that PSBs’ loan growth trajectory could be pulled down to a compounded annual growth rate of 9 per cent during FY16-19.

This (loan) growth is the bare minimum needed to generate sufficient spreads that can absorb the expected operating and credit costs of banks over this period, the agency said.

The growth is likely to be lower at 8.1 per cent over FY16-19 for mid-sized PSBs, with few banks witnessing a loan book decline.

The assessment of limited credit demand beyond the refinancing requirements of leveraged corporates appears to be largely in line with Ind-Ra’s estimated credit supply for FY17.

However, a sustained moderation in PSBs’ credit growth is likely to start impacting the nominal GDP pick-up for FY18-19.

The agency estimated credit costs to remain fairly high for PSBs (FY17: 170-180 basis points, FY16: 280 basis points) and impact profitability for FY17 and FY18, with a few of them likely to continue to report annual losses in this fiscal year too.

Credit cost is linked to the probability of default and banks need to increase provisioning expenses to cover potential losses.

Ind-Ra assessed that after the Reserve Bank of India’s asset quality review (AQR) in the first half of FY16, the quantum of fresh slippages from the large corporate exposure may decrease during FY17-18. However, many of these large borrower accounts, for the purpose of provisioning, have been recognised as non-performing loans (NPLs) from the date of restructuring.

Ind-Ra thus expects a sizeable proportion of NPLs (including slippages from FY15) to shift to the next classification bucket over the next 12-18 months and attract higher provisioning.

This will keep the pressure on coupon payments for hybrid instruments, particularly at banks with depleted revenue reserves.

Ind-Ra expects the unprovided non-funded exposure to some of the recognised large stressed accounts, such as iron and steel, to continue to pose a threat to the profitability of banks. However, the AQR exercise has ensured recognition of impaired loans and higher provisioning for cyclical sectors in deep stress. A large proportion of stressed corporates that are yet to be provided for, now belong to the infrastructure sector.

Hence, stress resolution with a going concern approach (such as the Scheme for Sustainable Structuring of Stressed Assets) may prove to be effective.

Ind-Ra estimates a Tier-1 capital requirement of ₹1.20-lakh crore from FY17-19 for banks at its calculated bare minimum growth rate for PSBs.

In other words, this is the viability capital required to protect the return on assets on levels at which banks would be able to absorb operating and credit costs projected by Ind-Ra, over FY17-19.

This capital estimate is over and above the ₹45,000 crore committed to be infused by the Centre in the remaining tranches of the Indradhanush framework.