Rating firm Crisil has said intensifying asset quality problems at public sector banks have the potential to impair their credit risk profiles and necessitate significantly higher capitalisation of PSU banks either through government infusion or relaxation of regulatory capital norms.
Over the past 18 months, CRISIL 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 banking system weak assets1 are in the books of PSBs. Increasing stress is also visible in the quantum of strategic debt restructuring and 5/25 structuring being carried out by banks, it said.
CRISIL had earlier estimated weak assets in banks to rise to a high of around Rs.5.3 lakh crore or 6.3 per cent of total advances by March 2016. However, the deterioration in asset quality in the first nine months of FY16 has been faster than expected for reasons such as the severe downturn in global commodity prices, inability of the leveraged players to sell assets, and the proactive identification of stressed assets as part of RBI’s asset quality review. “We believe the provisioning requirement of PSBs will increase further and render their pre-provisioning profits inadequate, leading to a significant deterioration in earnings profiles,” Crisil said.