Global rating agency Moody’s has said the asset quality of public sector banks will remain under pressure over the next 12 months and increased provisioning would constrain profitability and limit internal capital generation. As a result, 11 PSU banks will need Rs 1,20,000 crore capital — Rs 50,000 crore more than the amount the government has planned to inject into them to bolster their balance sheets.
The 11 lenders which will include State Bank of India, Bank of Baroda and Bank of India will need the capital through 2020, it said. The government has announced Rs 70,000 crore capital infusion for 22 PSU banks by March 2019. Of this, 25,000 crore has already been injected and the government plans to infuse as much during the current fiscal.
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After analysing the earnings of these banks for the financial year ended March 2016, Moody’s said the increased provisioning would constrain profitability and limit internal capital generation. The asset quality review mandated by the Reserve Bank of India (RBI) in the second half of 2015-16, in an effort to clean up the banks’ balance sheets, has adversely affected their profitability.
The review has resulted in higher non-performing loan (NPL) ratios and increased loan loss provisioning expenses. Eight of the 11 public sector banks (PSBs), rated by Moody’s, posted a net loss for the full fiscal. The remaining three reported a significant decline in profits. “We expect the capitalisation profile of the PSBs to further deteriorate, unless the government provides additional capital support,” the ratings agency said.
Gross NPAs of lenders have surged by a whopping Rs 2,41,000 crore in just six months — December and March quarters of fiscal 2015-16 — mostly due to the aggressive provisioning undertaken by PSU banks at the behest of the RBI. As a result, gross NPAs have gone up from Rs 349,113 crore in September 2015 when the RBI ordered the asset review to Rs 590,772 crore by March 2016. “In view of their results for the fiscal year ended March 2016, Moody’s analysis suggests capital requirements of about Rs 1.2 lakh crore for its 11 rated public sector banks, far higher than the remaining Rs 45,000 crore included in the government’s budget for capital distribution to the banks until 2020,” Moody’s said.
According to it, these banks’ asset quality will remain under pressure over the next 12 months, as they continue to recognise NPLs from some of the larger leveraged corporate groups, particularly in the steel and power sectors. “As a result, elevated provisioning expenses will continue to constrain profitability and limit internal capital generation,” Moody’s said.