Intensifying asset quality problems at public sector banks (PSBs) have the potential to impair their credit risk profiles and necessitate significantly higher capitalisation, either through government infusion or relaxation of regulatory capital norms, says credit rating agency Crisil.
The agency has cautioned that due to deteriorating asset quality, the provisioning requirement of PSBs will increase further and render their pre-provisioning profits inadequate, leading to a significant deterioration in earnings profiles.
“We believe the Centre will have to step in and provide more capital than what was committed under the Indradhanush plan, and we will be on the lookout for government announcements for such measures, including those in the upcoming Union Budget.
“If that doesn’t happen, Crisil’s threshold of ‘high safety category’ for PSBs could get lowered,” it said.
Budget allocation In July 2015, the Centre had said it would make available ₹70,000 crore to PSBs out of budgetary allocations for four years, beginning FY2016. It wants to adequately capitalise all banks to keep a safe buffer over and above the minimum norms of Basel III. Over the past 18 months, the agency has either downgraded or revised its outlook to ‘Negative’ on nine out of the 25 PSBs that it rates, on the back of expectations of worsening asset quality.
As much as 85 per cent of the banking system’s weak assets are in the books of PSBs, Crisil said in a statement.
The agency observed that increasing stress is also visible in the quantum of strategic debt restructuring (involving the provision to convert debt into equity) and 5/25 structuring (periodic refinancing and fixing a longer repayment schedule for long-term projects), being carried out by banks.
Weak asset quality Crisil, in May 2015, had estimated weak assets in banks to rise to a high of around ₹5.3 lakh crore or 6.3 per cent of the total advances by March 2016.
However, deterioration in asset quality in the first nine months of the current fiscal has been faster than expected for various reasons, such as the severe downturn in global commodity prices, inability of leveraged players to sell assets, and proactive identification of stressed assets as part of the Reserve Bank of India’s asset quality review, it added.
Crisil said it is undertaking a detailed analysis of the impact on the credit risk profile of banks it rates.
“We will factor in the deterioration in standalone credit profile as well as any development on the capital front for PSBs in our rating or outlook changes to be announced subsequently,” it added.