The credit profiles of state-run banks are under pressure following huge losses in the past two consecutive quarters which have weakened their core capital adequacy, says international ratings agency Fitch.
Following the asset quality review by the Reserve Bank which ordered banks to make provisions for identified stressed accounts, the banks, led by state-run lenders, have reported close to Rs 2 lakh crore worth of fresh NPAs in the last two quarters taking the total stressed accounts to Rs 8 lakh crore or over 13 per cent of the system.
The 45 listed banks have identified as much as Rs 5.81 lakh crore worth of loans as NPAs alone as of March 2016.
“State-run banks’ inability to strengthen their capital in a timely manner could have a potentially negative impact on their ability to achieve balance-sheet stability, pursue credit growth and defend market share in the long-term,” Fitch said in a note today.
Noting that core capital ratios for many public sector banks are close to or below the Basel III 2019 minimum regulatory requirement of 8 per cent, it said the domestic banking sector is unlikely to build capital through internal capital generation in the light of the dim earnings outlook, at least for the next two years due to provisioning pressure.
Fitch ratings said cumulative losses at Indian public-sector banks in second half of the past fiscal year were more than double the government’s capital injection in the financial year 2015-16. They had eroded nearly 15 per cent of capital as of financial year 2014-15. This has heightened the sector’s need for additional external capital.
“We are likely to reassess our $140 billion estimated capital need for the system under Basel III, of which public sector banks will continue to account for the dominant share,” the report said.
Though the recent RBI steps to allow part of the revaluation reserves into core equity has helped counter some of the pressure, but it is not enough, keeping in mind the higher capital requirements, it further said.
The report also notes that there are few options for the private sector capital to flow in now and their ability to approach the capital markets is likely to remain weak.
The state-run banks face higher capital risks with their average net NPL to equity ratio at around 70 per cent against 8 per cent for private banks.
The note said the new Insolvency and Bankruptcy Code may significantly improve resolution timeframe in a timely and effective manner. So is the recent Reserve Bank move to cap banks’ exposure to large corporate borrowers, as it can further reduce systemic risk by limiting concentration risk to large corporates.