India’s public sector banks (PSBs) will not be able to raise funds from the market and the government will have to provide them capital support to avoid the risk of downgrade in their credit profiles, ratings agency Moody’s said on Monday.
“Given the weak solvency position of many PSBs, we expect the remedial measures will require substantial external capital. With little chance of banks accessing the capital markets in the near term, we expect much of the capital support will be required from the Indian government,” Moody’s Investors Service Group vice-president Alka Anbarasu told journalists.
“From a timing perspective, the front-ending of problem loans recognition and provisioning requirement has brought upfront the capital requirements of Indian public banks. Hence, unless the government revises upwards its capital infusion plan, there will be negative pressure on the credit profiles of these banks,” she said.
Moody’s currently rates 11 PSBs, including State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank and IDBI.
PSBs are currently engaged in an asset quality review following a Reserve Bank of India (RBI) directive, which has led to an increase in bad loans and provisioning.
Industry body Assocham said last week that the slowdown in steel, textiles, aluminium and others coupled by ongoing Asset Quality Review (AQR) is likely to push banks’ stressed assets to Rs 10 lakh crore mark in the fourth quarter of 2015-16.
“At the end of December (2015), the total stressed assets of all the banks were at Rs 8 lakh crore that is expected to see a significant jump in the current quarter itself,” said a study by the industry body.
It said total stressed assets of banks rose four-fold to Rs 7.40 lakh crore by the end of March 2015 from Rs 2.33 lakh crore as of March 2011.
Assocham noted that in nine months from April to December 2015, gross non-performing assets (NPA), or bad loans, rose by Rs 1 lakh crore from Rs 2,98,641 crore to Rs 4,01,590 crore.
In percentage terms, gross NPA ratio of public sector banks shot up from 5.43% in March 2015 to 7.3% by December 2015, the study said.
Assocham highlighted that mounting loans have made 11 PSBs report losses of Rs 12,867 crore in Q3 of 2015-16.
At the first meeting of the recently-formed Bank Board Bureau (BBB) held earlier this month at the RBI headquarters in Mumbai, the issues plaguing NPAs and strategies for recapitalising banks were discussed.
The minister of state for finance Jayant Sinha said at the bankers’ conclave “Gyan Sangam” in Gurgaon last month that the government will infuse additional capital over and above the Rs.25,000 crore provided in the 2016-17 budget and ensure that banks are adequately capitalised.