 "'Banks need additional Rs 1 lakh cr to manage stressed loans'")
Banks would need an additional Rs 1 lakh crore to manage their exposure to highly leveraged and stressed companies, according to a India Ratings & Research report. Of this, Rs 93,000 crore is needed by public sector banks (PSBs), the rating agency said.
This capital requirement will be over and above the estimated up to Rs 2.40 lakh crore (as estimated by India Ratings) needed by the PSBs to meet the Basel-III requirements.
"The amount is equivalent to an equity write-down of about 1.7 per cent of the banks' risk weighted assets (RWA), and represents the loan haircut that banks may face to revive the financial viability of distressed accounts. All exposures are currently treated as performing and carry minimal loan loss provision of five per cent or less," said the report.
This evaluation of capital requirement does not include state electricity boards (SEBs). If the SEBs are also taken into account, then the amount of capital needed will go up by Rs 21,000 crore. The rating agency said this will also increase the government's equity injection requirement into the PSBs. Last month, the government had announced it would be infusing Rs 70,000 crore into the state-owned lenders in the next four years. This Rs 70,000 crore is only 42 per cent of these banks' overall estimated requirement of Rs 1.8 lakh crore.
For this, the rating agency had analysed 30 large stressed corporates, each with an individual bank debt of over Rs 5,000 crore. All these loans to corporates have been accounted for as performing assets. Since these assets have been categorised as performing loans banks, have to make lesser provisioning as compared to when they turn non-performing assets (NPAs).
Therefore, the lenders will need additional capital to manage these assets in case the stress in the sectors does not ease.
"The power and other infrastructure sectors account for 50 per cent of this exposure while the iron & steel sector accounts for another 32 per cent. Aviation, ship-building, sugar and textile bring up the balance. These companies have seen a significant increase in their leverage over the last few years during a period of weak operating environment," added the report
Though large PSBs and private banks are better placed to deal with the hike in credit costs, it will mainly be the mid-sized PSBs which would be the worst affected.
The report also added that banks will need an additional 24 per cent reduction in their current exposure to ensure there is reasonable debt servicing by corporates on a sustained basis,
The analysts believe the schemes, like the 5/25 refinancing schemes, may solve short-term liquidity problems but the banks will have to take a haircut to service the debt. Under the 5/25 scheme, banks can extend loan repayments for a period up to 25 years, with an option of refinancing the loan every five years.
This capital requirement will be over and above the estimated up to Rs 2.40 lakh crore (as estimated by India Ratings) needed by the PSBs to meet the Basel-III requirements.
"The amount is equivalent to an equity write-down of about 1.7 per cent of the banks' risk weighted assets (RWA), and represents the loan haircut that banks may face to revive the financial viability of distressed accounts. All exposures are currently treated as performing and carry minimal loan loss provision of five per cent or less," said the report.
This evaluation of capital requirement does not include state electricity boards (SEBs). If the SEBs are also taken into account, then the amount of capital needed will go up by Rs 21,000 crore. The rating agency said this will also increase the government's equity injection requirement into the PSBs. Last month, the government had announced it would be infusing Rs 70,000 crore into the state-owned lenders in the next four years. This Rs 70,000 crore is only 42 per cent of these banks' overall estimated requirement of Rs 1.8 lakh crore.
For this, the rating agency had analysed 30 large stressed corporates, each with an individual bank debt of over Rs 5,000 crore. All these loans to corporates have been accounted for as performing assets. Since these assets have been categorised as performing loans banks, have to make lesser provisioning as compared to when they turn non-performing assets (NPAs).
Therefore, the lenders will need additional capital to manage these assets in case the stress in the sectors does not ease.
"The power and other infrastructure sectors account for 50 per cent of this exposure while the iron & steel sector accounts for another 32 per cent. Aviation, ship-building, sugar and textile bring up the balance. These companies have seen a significant increase in their leverage over the last few years during a period of weak operating environment," added the report
Though large PSBs and private banks are better placed to deal with the hike in credit costs, it will mainly be the mid-sized PSBs which would be the worst affected.
The report also added that banks will need an additional 24 per cent reduction in their current exposure to ensure there is reasonable debt servicing by corporates on a sustained basis,
The analysts believe the schemes, like the 5/25 refinancing schemes, may solve short-term liquidity problems but the banks will have to take a haircut to service the debt. Under the 5/25 scheme, banks can extend loan repayments for a period up to 25 years, with an option of refinancing the loan every five years.