Weak capitalisation levels will remain a key credit weakness for Moody’s-rated Indian public sector banks, particularly in the context of the increasing requirements for equity under Basel-III, and the limited ability of banks to raise external capital, said Moody’s Investors Service.
“In our central scenario, we estimate that the 11 Moody’s-rated public sector banks will require external equity capital of ₹70,000-95,000 crore, or about $10.6-14.6 billion,” said Alka Anbarasu, a Moody’s Vice-President and Senior Analyst.
Such an amount is much higher than the remaining ₹20,000 crore budgeted by the government for capital infusion until March 2019, she added.
Moody’s analysis assumes that the stock of impaired loans will increase during the horizon of this outlook, but at a slower pace versus the last two years.
Furthermore, the rating agency expects credit costs to stay broadly in line with the levels during the fiscal year ended March 31, 2017. Consequently, it does not expect any material improvements in the banks’ profitability profiles over the next two years.
Moody’s noted that many public sector banks have announced plans to raise external capital (equity and additional tier-1 capital) in FY18. However, it believes that capital infusions from the government remain the only viable source of external equity capital, because of PSBs’ low capital market valuations, which would likely continue to deny them the option of raising fresh equity from the capital market.
NPA resolution Moody’s Indian affiliate ICRA, said because the pace of non-performing asset (NPA) resolution is sluggish the asset quality outlook for the Indian banking sector will remain weak, despite the moderation in the formation rate of fresh NPAs.
“We estimate the fresh NPA generation at 5.5 per cent for FY17 compared to 6 per cent for FY16, while the overall stressed assets for the banking system is estimated at 16-17 per cent as on March 2017,” said Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA.
ICRA said that with a further 86 per cent of fresh NPAs generated during FY17 coming from outside the restructured book, the pressure on asset quality indicators has exacerbated, because credit offtake is likely to remain tepid, given the banks’ capital constraints.
In addition, the impending expiry of the 18-month period on the applicability of the standstill clause for asset classification under the strategic debt restructuring (SDR) framework during the current year could pose upside risks.
ICRA, therefore, estimates that the gross NPAs will increase to ₹8.2-8.5 lakh crore (GNPA ratio of 9.9-10.3 per cent) by the end of FY18 as against ₹7.65 lakh crore (GNPA of 9.5 per cent) by the end of FY17, with upside risks if there is slower resolution of SDR accounts, thereby leading to higher slippages.
The agency, however, believes that the recent ordinance by the government for amendment in the Banking Regulation Act of 1949 is a positive for banks, because it highlights the urgency and willingness of the government to resolve the stressed assets challenge in the banking system.
However, PSBs’ limited profitability and capital cushions will prove to be challenges in terms of their ability to absorb the haircuts stipulated by the committees constituted for resolution of stressed assets.