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Wednesday, August 05, 2020

Asset quality and profitability stressed, banks to raise Rs 1,50,000 crore in next 12-18 months

Reserve Bank of India (RBI) Governor Shaktikanta Das on Saturday had said that “building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system” in the wake of the pandemic-induced stress.

By: ENS Economic Bureau | Published: July 13, 2020 1:06:36 am
Almost all leading banks have announced their plans to raise capital in the last few weeks to beef up their balance sheets and make provisioning. (File)

In a mega fundraising plan, banks have lined up to raise a record Rs 1,50,000 crore from the capital market in the next 12-18 months, against the backdrop of weak capital cushion and the expected increase in stress on asset quality and profitability in the wake of the economic impact of the pandemic.

Almost all leading banks have announced their plans to raise capital in the last few weeks to beef up their balance sheets and make provisioning. Banks are at the frontline of being adversely impacted by the COVID-19 pandemic as economic contraction reduced corporate earnings and individual incomes, reducing the capacity to repay debts.

Reserve Bank of India (RBI) Governor Shaktikanta Das on Saturday had said that “building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system” in the wake of the pandemic-induced stress.

He also indicated that existing minimum capital requirements for banks may no longer be sufficient enough to absorb likely losses.

“Banks have raised their capital requirements as bad loans are expected to rise significantly and profits are likely to be under pressure in coming months, especially after the moratorium ends in August. A big amount may be required to make provisioning,” said an official of a nationalised bank.

Credit Suisse had forecast that banks may need $20 billion in additional capital in FY21. Public sector banks (PSBs), which earlier estimated a capital requirement of Rs 10,000-20,000 crore for FY21, have more than doubled their capital requirement. The Centre, on the other hand, had expected PSBs to raise capital from markets and hence possibly did not Budget any capital infusion for 2020-21.

“With thin capital cushions and expected increase in stress on asset quality and profitability, we expect PSBs to require Rs 45,000-82,500 crore of capital even under a scenario of low credit growth of 3-4 per cent during FY2021. Further, the investor appetite towards these banks will continue to remain weak amid prevailing uncertainties,” said Anil Gupta, sector head—financial sector ratings, ICRA Ratings.

Das had noted that a recapitalisation plan for PSBs and private banks has become necessary as the economic impact of the pandemic — due to lock-down and anticipated post lock-down compression in economic growth—may result in higher NPAs and capital erosion of banks.

State Bank of India has planned to mobilise around Rs 20,000 crore, while Punjab National Bank will raise equity capital up to Rs 7,000 crore via share sale to strengthen its balance sheet. Bank of Baroda’s board approved fund raising plans of up to Rs 13,500 crore and Canara Bank has planned to raise Rs 6,000-8000 crore in capital. For the five years between 2015-16 and 2019-20, the government had infused a total of Rs 3.08 lakh crore capital PSBs. However, this will not be sufficient given the expected spike in non-performing assets (NPAs).

Private banks have also firmed up plans for capital raising activity of around Rs 75,000-1,00,000 crore. Three private banks — Yes Bank, Axis Bank and ICICI Bank — have already announced plans to raise Rs 45,000 crore. While HDFC Bank recently obtained approval to raise Rs 50,000 crore by way of additional tier-1 bonds, it’s unclear how much will it raise in FY21.

Kotak Mahindra Bank had raised Rs 7,442 crore through a qualified institutional placement issue. Besides, several small private banks are also gearing up to raise funds. More banks are expected to announce capital raising plans going forward.

The uncertainty on the asset quality of banks remains high with almost 30-40 per cent of loan book across various banks under moratorium announced by the RBI. Gross NPAs are likely to rise to 11.3-11.6 per cent by March 2021 from an estimated level of 8.6 per cent for March 2020, with a fresh gross slippage of 5.0-5.5 per cent of standard advances during FY2021, ICRA has said.

As per Basel III regulations, banks were required to maintain a capital adequacy ratio (CAR) of 11.5 per cent from March 31, 2020 onwards. This included CAR of 9 per cent along with capital conservation buffer (CCB) of 2.5 per cent. However, with the outbreak of COVID-19, the RBI decided to defer the implementation of the last tranche of 0.625 per cent of the CCB from March 31 to September 30, so the current required CAR stands at 10.875 per cent.

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