Indian banks will need $65 billion to meet Basel 3 capital norms by March 2019, said rating agency Fitch in a report on Tuesday. The estimated capital requirement has been brought down from $90 billion earlier, due to asset rationalisation and weaker-than-expected loan growth, said the rating agency.
Still, it still won’t be easy to raise the required funds.
State-owned banks, which account for 95 percent of the estimated shortage, will still find it difficult to raise funds, said Fitch. “Prospects for internal capital generation are weak and low investor confidence impedes access to the equity capital market,” the rating agency explained.
Access to the Additional Tier 1 (AT1) capital market has improved in recent months - reflecting state support to help state banks avoid missing coupon payments - but around two-thirds of the capital shortage is in the form of common equity Tier 1 (CET1).Fitch Ratings
Indian banks need urgent capital infusion to help clean-up their balance sheets which are laden with bad loans. The stressed asset ratio (which includes bad loans and restructured loans) of Indian banks has hit 12 percent, according to a presentation made by Reserve Bank of India (RBI) deputy governor Viral Acharya last week. For state-owned banks, this ratio is higher at close to 16 percent.
While the government has committed to infusing Rs 10,000 crore each into these lenders this year and next year, the amount is considered insufficient. A “decisive and adequate bank recapitalization” is critical to address the bad loan problem, Acharya argued in his speech.
Fitch also believes that government intervention is essential.
The government is committed to investing only another $3 billion in fresh equity for 21 state banks over FY 18 and FY 19, having already provided most of the originally budgeted $11 billion. Fitch believes the government will have to pump in more than double, even on a bare minimum basis (excluding buffers), if it is to raise loan growth, address weak provision cover, and aid in effective NPL (non performing loans) resolution.Fitch Ratings
According to the rating agency, some capital could be released through the resolution of large bad loan accounts. The RBI has already asked banks to refer 12 accounts for insolvency. It has given lenders time until December to resolve another 30-40 accounts before taking these accounts into insolvency as well.
Most banks do not expect haircuts on these accounts to exceed 60 percent, said Fitch but pointed to the experience in the first case to be resolved under the Insolvency regime - Synergies-Dooray Automotive - where banks only recovered 6 percent of their capital.
The rating agency further warned that unless the capital shortage is plugged, state owned banks will be unable to grow and keep losing market share. These banks have already lost 3 percentage points in market share to private banks since fiscal 2012, according to Fitch.
Indian banks’ loan growth slumped to 4.4 percent in FY17 - the lowest in several decades - and it is unlikely that state banks will grow at all in the foreseeable future given their capital constraints. Many state banks, particularly smaller ones, will struggle to survive as individual banks, and could be swept up into the government’s consolidation agenda.Fitch Ratings