The credit profiles of public sector (PSU) banks are under pressure as heavy losses reported in the last two consecutive quarters weaken their core capital adequacy, says a Fitch Ratings report.
“An inability to strengthen capital in a timely manner could have a potentially negative impact on banks’ ability to achieve balance-sheet stability, pursue credit growth and defend market share in the long term,” it said. Core capital ratios for many public-sector banks are close to or below the Basel III financial year 2019 (FY19) minimum regulatory requirement of 8 per cent, and the sector is unlikely to build capital through internal capital generation in light of the dim earnings outlook – at least over the next two years due to the ongoing provisioning pressure. “The cumulative second half of FY16 losses at PSU banks were more than double the government’s capital injection in FY16, and had eroded nearly 15 per cent of capital as of FYE15. This has heightened the sector’s need for additional external capital,” Fitch report said.
The gross NPAs in the banking system at the end of March 2016 are estimated at Rs 580,000 while the provisions set aside by banks in FY16 were Rs 143,000 crore. While the total losses by the public sector lenders in FY16 stood at Rs 23,400 crore, stressed assets (NPAs plus restructured assets) amount to over Rs 800,000 crore.
“We are likely to reassess our $ 140 bn estimated capital need for the system under Basel III, of which PSU banks will continue to account for the dominant share. Recent steps by India’s central bank to allow part of the revaluation reserves into core equity has helped counter some of the pressure, but is not enough, keeping in mind the higher capital requirements,” Fitch said.
There are few options for private-sector capital for now. “PSU banks’ access to capital markets is likely to remain weak. There is little additional Tier 1 capital issuance either (around $ 500m since January). The government remains the most important source of new capital for the sector. The sector’s requirement for new capital needs to be addressed to meaningfully ..,” Fitch said. Fitch has long assessed India’s banking system on a stressed-asset basis — rather than narrowly defined NPLs — to factor in the risks of significant under-provisioning and weak capital.