India’s Public Sector Banks Will Need Rs 2.1 Lakh Crore Over Next Two Years: Moody’s
India’s public sector banks will need external capital of up to Rs 2.1 lakh crore over the next two years and the government will most likely plug this shortfall, Moody’s said.
According to the credit ratings agency, the sharp slowdown in the Indian economy, exacerbated by the coronavirus pandemic, will hurt the asset quality of public sector banks and drive up credit costs.
"We expect to see public sector banks’ already weak capital buffers to be depleted, with Rs 1.9 trillion-Rs 2.1 trillion in external capital needed over the next two years to restore loss-absorbing buffers," Alka Anbarasu, vice president and senior credit officer at Moody’s Investors Service, said in a report released Friday.
The government-owned lenders dominate India’s banking system, meaning any failure could jeopardise financial stability. "As such, we expect the government support will remain forthcoming," she said.
The Indian economy will contract sharply in the financial year ending March 2021 before returning to modest growth in the next fiscal. "As a result, the formation of new non-performing loans will accelerate substantially, driven by the retail and micro, small and medium enterprises segments,” Moody’s said.
"Although one-time restructuring allowed by the Reserve Bank of India will prevent a sudden increase in non-performing loans, non-performing loans and credit costs will increase in the next two years, hurting public sector banks’ already weak profitability and depleting their capitalisation," it said.
According to Moody’s:
- Of the total capital requirement, public sector banks will need about Rs 1 lakh crore to build loan-loss provisions to 70% of non-performing loans, which will leave them with enough capacity to grow loans 8-10% annually, faster than the 4% in FY20.
- But uncertainty surrounding India's economic recovery as well as the ongoing clean-up of balance sheets are making it difficult for most public sector banks to raise equity capital from markets.
"This means public sector banks will continue to need support from the government to plug their capital shortfalls, and we expect the government to infuse fresh funds into them as it has done in the past.
"If public sector banks...fail to function properly in the absence of state capital support, the country will face a deepening credit crunch, hampering its economic recovery," the ratings agency said.