 "Is it time to consider PSU Banks?")
Limited availability of growth capital for public sector banks (PSBs) could pull down their loan growth to a compound annual rate of nine per cent between 2015-16 and 2018-19, says India Ratings and Research.
This would be the minimum needed to generate sufficient spreads for absorbing the expected operating and credit costs over this period, it said. And, this is likely to be lower, at 8.1 per cent over FY16-19 for mid-sized PSBs; some would likely see a loan book decline.
Even for this much growth, it said, the average Tier-1 capital needed during FY17-19 would be 22 per cent of the estimated FY16 common Tier-I equity. This estimate is over and above the capital committed under the government's Indradhanush programme.
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The limited credit demand beyond the refinancing requirements of leveraged companies appears to be largely in line with the estimated credit supply for FY17. Yet, sustained moderation in PSBs’ loan growth is likely to start impacting the nominal gross domestic product pick-up for FY18-19.
The agency expects ageing of non-performing assets to keep credit costs for PSBs at elevated levels of 170-180 basis points in FY17 (280 bps in FY16). This will continue to put pressure on profit. So, some would continue to report losses in FY17.
Following the asset quality review (AQR) initiated by the Reserve Bank in the first half of FY16, a sizeable proportion of non-performing loans (including slippages from FY15) are likely to shift to the next classification bucket over FY17-18, attracting higher provisioning. The amount of new slippage from the large corporate exposure might come down during FY17-18.
The unprovided non-fund-based exposures of large stressed accounts will continue to pose a threat to profit in the current and next financial years, it said.
However, the AQR exercise has ensured recognition of impaired loans and higher provisioning for cyclical sectors in deep stress, such as iron and steel.
A large proportion of stressed units that are yet to be provided for now belong to the infrastructure sector. Hence, stress resolution with a going concern approach might prove to be effective, the rating agency added.
