New Delhi: Stressed assets of Indian banks will increase until 2019 and capitalization will remain a key credit weakness for state lenders, who will need up to 95,000 rupees of additional capital over the next two years, Moody’s said today.
Public sector banks have limited capacity to raise external capital and, therefore, government infusion remains the only viable source for sustaining the capital base, Moody’s Investors Service reported in a report – “The capitalization profiles of Indian banks worsen; The outlook for asset quality remains weak. ”
Moody’s Indian subsidiary ICRA said the asset quality outlook for the banking sector will remain weak. Non-performing Gross Assets (NPA) or uncollectible loans will increase to Rs 8.2 -Rs 8.5 lakh crore (9.9-10 per cent of total advances) by the end of 2017-18 against Rs 7.65 lakh crore (9.5 per cent) in the Finals Of March 2017.
“In our core scenario, we estimate that the 11 Moody’s public sector banks will require external capital of about Rs 70,000-95,000 crore, or about USD 10.6-14.6 billion,” said Moody’s senior vice president and analyst Alka Anbarasu.
“The stock of impaired loans will rise over the horizon from this perspective, but at a slower pace compared to the last two years,” said Moody’s.
The capital requirement is much higher than Rs 20,000 crore budgeted by the government towards capital infusion until March 2019. Under Indradhanush’s plan for recapitalization of banks, the government is infusing Rs 70,000 crore into the PSU banks from 2015.
Of this, the government has already infused Rs 50,000 crore in the last two prosecutors and the rest will be pumped by the end of 2018-19. According to the plan, PSBs are expected to raise Rs 1.10 lakh crore from markets, including follow-on bids, to comply with the Basel III capital adequacy rules, which begin in March 2019.
While it expects credit costs to remain broadly in line with the levels during the last fiscal year, Moody’s does not expect significant improvements in banks’ profitability profiles over the next two years.
“Government capital injections remain the only viable source of external capital because of low capital market assessments of public sector banks, which would likely continue to deny them the option of raising capital from the markets of Capital, “the agency said.
Because the pace of NPA resolutions is slow, ICRA’s outlook on bank asset quality remains weak even as the pace of the next NPA generation slows.
“We estimate that NPA’s fresh generation at 5.5 percent for fiscal year 17, compared with 6 percent for fiscal year 16, while assets underlined overall for the banking system stood at around 16-17 percent as of March 2017, “ICRA Group leader, financial sector ratings, said Karthik Srinivasan.
He said that the recent Ordinance issued by the Government of India for the amendment in the Banking Regulation Act of 1949 is a positive for banks, as it highlights the urgency and willingness of the government to solve the asset challenges highlighted by Bank System.
Moody’s also said that its stable outlook for non-financial corporations in India over the next 12-18 months largely reflects the country’s sustained economic growth.
Considers that its projected high GDP growth for India of 7.5 percent for the current fiscal and of 7.7 percent for the next fiscal, capacity additions and stabilizing commodity prices will support the growth of EBITDA of 6-12 percent for companies in the next 12-18 months. ICRA said a rebound in consumer demand, lower input costs and structural reforms will support a gradual recovery in the corporate sector.
The agencies further stated that a well-distributed and timely monsoon would be crucial for the continued recovery in the performance of a range of retail loans affected by demonetization.
A normal monsoon, together with the push of government policies such as the minimum support price (MSP) and welfare schemes such as NREGA would help improve the incomes of rural households and, consequently, the ability to pay loan.
