Public sector banks will need as much as Rs 95,000 crore in capital over two years, which is way higher than the Rs 20,000 crore capital infusion that the government plans till March 2019, a Moody's-ICRA report said on Thursday.
"In our central scenario, we estimate that the 11 Moody's-rated public sector banks will require external equity capital of about Rs 70,000-Rs 95,000 crore, or about $10.6-$14.6 billion," Alka Anbarasu, Moody's Vice-President and senior analyst, said.
The observations were part of the Moody's Investors Service and ICRA report released at a media briefing here.
Many public sector banks have announced plans to raise external capital in the current fiscal, Moody's noted.
"However, Moody's believes that capital infusions from the government remain the only viable source of external equity capital, because of the public sector banks' low capital market valuations, which will likely continue to deny them the option of raising fresh equity from the capital markets," it said.
The report also forecast no improvement in banks' profitability profiles over two years because of the slow process of resolution of bad debts.
"Because the pace of non-performing asset (NPA) resolutions is sluggish, ICRA's outlook on the banks' asset quality remains weak, even as the pace of fresh NPA generation slows," it said.
Moody's Investors Service said weak capitalisation levels will remain a key credit weakness for public sector banks, particularly in the context of increasing requirements for equity under Basel III and the limited ability of the banks to raise external capital.
Moody's Indian affiliate, ICRA, said the asset quality outlook for the Indian banking sector will remain weak, despite moderation in the formation rate of fresh NPAs.
"We estimate the fresh NPA generation at 5.5 per cent for 2016-17 compared with 6 per cent for 2015-16 while the overall stressed assets for the banking system stood is estimated at around 16-17 per cent as of March 2017," Karthik Srinivasan, Group Head, Financial sector ratings, ICRA, said.
"The stock of impaired loans will increase at the horizon of this outlook, but at a slower pace versus the last two years. Furthermore, Moody's expects credit costs to stay broadly in line with the levels during the fiscal year ended March 31, 2017," he said.
ICRA, however, said that the government's ordinance to amend the Banking Regulation Act of 1949 is a positive for the banks, because it highlights the urgency and government willingness to resolve the stressed asset challenges in the Indian banking system.
"However, the banks' limited profitability and capital cushions will prove a challenge in terms of them absorbing the steps stipulated by committees constituted for the resolution of stressed assets. Such steps are a critical factor in the resolution of these accounts," it said.
"A likely increase in NPAs and the need to raise the provision cover against these bad loans under the prompt corrective action framework will keep credit costs elevated in the current year. Given the limited time frame under the bankruptcy code to resolve the accounts and impending increase in credit costs, the banks will also be forced to accelerate the capital raising process from the markets, given that the planned infusion by the government is limited in 2017," it added.
--IANS
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