People walk past the State Bank of India main branch office in Mumbai, India (Photographer: Prashanth Vishwanathan/Bloomberg News)  

In Charts: Public Sector Banks Require Additional Rs 77,000 Crore Capital, Says ICRA

ICRA Ltd. said 21 public sector banks will require an additional Rs 54,000-77,000 crore to meet regulatory requirements in the financial year ending March 2020. Also, seven private banks will need to raise around Rs 20,000 crore in equity capital, the rating agency said.

The central government had budgeted Rs 1.06 lakh crore as part of its bank recapitalisation plan for financial year 2018-19. Of this, around Rs 1.01 lakh crore has been infused. That, ICRA said, leaves an estimated Rs 5,000 crore of funds that can be used by the government in the next fiscal.

The government infused around Rs 1.91 lakh crore into public sector banks over the last two years, allowing five lenders to exit the Reserve Bank of India’s prompt corrective action framework—that places restrictions on banks with weak financial and operational metrics. Life Insurance Corporation of India’s capital infusion of Rs 21,624 crore into IDBI Bank in the ongoing fiscal took the total funds pumped into PSBs in two years to Rs 2.13 lakh crore.

Non-PCA banks received Rs 35,828 crore in FY18, while lenders under PCA framework got Rs 54,172 crore as part of the recapitalistion package, ICRA said. In FY19, non-PCA banks were given Rs 27,505 crore and PCA banks Rs 94,994 crore under the package.

Bank of Baroda, State Bank of India, Canara Bank, Vijaya Bank and Indian Bank did not receive additional capital from the government as they had “comfortable” capital adequacy ratios, it said.

As of December 2018, eight PSBs had tier-1 capital ratio—the ratio of a bank’s core equity capital to its total risk-weighted assets—below the regulatory requirement of 8.87 percent, ICRA said. Only one of the 18 private peers breached the tier-1 capital ratio requirement.

The Two Cases

If PSBs require Rs 54,000 crore

It means that the government will have to infuse around Rs 34,838 crore into PSBs as they raise around Rs 19,368 crore from the capital markets, it said.

If PSBs require Rs 77,000 crore

The burden on the government may swell to Rs 44,225 crore, while they borrow or raise the rest from capital market, ICRA said.

Asset Quality And Bad Loans

Total gross non-performing assets of Indian banks stood at Rs 9.6 lakh crore as of December 2018, lower from the peak of Rs 10.3 lakh crore at the end of March.

The rating agency expects the gross bad loans to come down to Rs 8.3 lakh crore by the end of next financial year. The gross NPA ratio across all banks is expected to fall to 9.4 percent by the end of 2018-19 and to 8 percent by the end of FY20 from 11.7 percent as of March 2018, it said.

Following the Reserve Bank of India’s Feb. 12, 2018 circular, banks had to speed up recognition and resolution of defaulted accounts. Total slippages of all banks stood at Rs 2.26 lakh crore as of December 2018 compared with Rs 5.31 lakh crore at the end of March.

Fresh Slippages In PSBs

Banks have recovered around Rs 2 lakh crore, or 65-70 percent of their advances to stressed corporates that are undergoing insolvency proceedings. Fresh slippages peaked in the fourth quarter of the previous financial year for public and private lenders. ICRA, however, expects that it will reduce in the financial year ending March 2020.

ICRA Research
Trend in Fresh Slippages for Public Sector Banks

Fresh Slippages In Private Lenders

Improved asset quality, write-offs of bad loans, capital infusion, raising funds from capital markets and improvement in provisioning improved the solvency—ability to meet long-term financial obligations—of private lenders, the rating agency said.

Trend in Fresh Slippages for Private Sector Banks

Credit And Deposit Growth

The average deposit growth for the 41 banks analysed by ICRA stood at 7.8 percent, while the average credit growth stood at 8.4 percent, according to the rating agency.

Credit growth for private banks is estimated to be between 12 percent and 16 per cent in FY20, while PSBs can grow their lending book by 8-10 percent if they are able to raise adequate capital and shrink their overseas book, ICRA said.

Over time, private banks have gained market share at the cost of PSBs both in terms of deploying credit and mobilising deposits. But that’s expected to reduce as PSBs may bounce back after facing nearly six years of balance sheet and asset quality issues, the rating agency said.

“Private banks have been mobilising bulk deposits and this increases cost of funds as it is more sensitive to interest rates in a liquidity deficit scenario. If PSBs also compete for bulk deposits, this will increase competition for private banks,” ICRA’s Senior Vice President Karthik Srinivasan and Vice President Anil Gupta of ICRA, said.

The increased competition between PSBs and private banks can put pressure on deposit rates while lending rates may not come down if credit growth remains high, the rating agency said.

Public Banks’ Profitability

The “worst of the bad loan cycle” seems to end, improving profitability of PSBs, according to ICRA. Yet, the overall return on equity and return on assets will remain weak, it said.