Global ratings firm Moody’s Investors Service on Thursday said public sector banks, hit by stressed assets, will require external equity capital of up to Rs 95,000 crore in the next two years. Further, Moody’s Indian affiliate ICRA has estimated that gross non-performing assets (GNPA) will increase to Rs 8,20,000-8,50,000 crore (GNPA of 9.9-10.3 per cent) by the end of FY2018 as against Rs 7,65,000 crore (GNPA of 9.5 per cent) by the end of FY2017. Moody’s said weak capitalisation levels will remain a key credit weakness for public-sector banks in the wake of increasing requirements for equity under Basel-3 norms and the limited ability of the banks to raise external capital.
While Moody’s noted that many public sector banks have announced plans to raise external capital (equity and additional tier 1 capital) in FY2018, it said capital infusions from the government remain the only viable source of external equity capital, because of the public sector banks’ low capital market valuations, which would likely continue to deny them the option of raising fresh equity from the capital markets.
The asset quality outlook for the Indian banking sector will remain weak, despite the moderation in the formation rate of fresh nonperforming assets (NPAs), ICRA said. “In our central scenario, we estimate that the 11 Moody’s-rated public sector banks will require external equity capital of about Rs 70,000-95,000 crore, or about $10.6-$14.6 billion,” says Alka Anbarasu, a Moody’s vice president and senior analyst. “Such an amount is much higher than the remaining Rs 20,000 crore budgeted by the government towards capital infusion until March 2019.”
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, it expects credit costs to stay broadly in line with the levels during the fiscal year ended March 2017. Consequently, Moody’s does not expect any material improvements in the banks’ profitability profiles over the next two years.
Because the pace of NPA resolutions is sluggish, ICRA’s outlook on the banks’ asset quality remains weak, even as the pace of fresh NPA generation slows. “We estimate the fresh NPA generation at 5.5 per cent for FY17 as compared to 6.0 per cent for FY16 while the overall stressed assets for the banking system stood is estimated around 16-17 per cent as on March 2017,” says Karthik Srinivasan, group head, Financial sector ratings, ICRA.
With a further 86 per cent of fresh NPAs generated during FY2017 coming from outside the restructured book, the pressure on asset quality indicators is exacerbated, because credit offtake will likely to remain tepid, given the banks’ capital constraints, it said. 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 framework during the current year could pose upside risks.