State Bank of India and 10 other public sector banks (PSBs) will need Rs 1.2 lakh crore capital, far higher than the amount government has planned to inject into them, to bolster their balance sheets, Moody's Investors Service said today.
The 11 lenders which also include Bank of Baroda and Bank of India will need about Rs 1.2 lakh crore in capital through 2020, it said.
The government has announced Rs 70,000 crore capital infusion for 22 public sector banks by March 2019. Of this, 25,000 crore has already been injected and the government plans to infuse as much during the current fiscal.
Finance Minister Arun Jaitley has said the government is willing to provide more funds to PSBs if required.
"In view of their results for the fiscal year ended March 2016 (FY2016), Moody's analysis suggests capital requirements of about Rs 1.2 lakh crore for its 11 rated public sector banks, far higher than the remaining Rs 45,000 crore included in the government's budget for capital distribution to the banks until 2020," the rating agency said.
After analysing the earnings of these banks for the financial year ended March 31, Moody's said the asset quality of the lenders will remain under pressure over the next 12 months and increased provisioning would constrain profitability and limit internal capital generation.
The asset quality review mandated by the Reserve Bank of India (RBI) in the second half of 2015-16, in an effort to clean up the banks' balancesheets, has adversely affected their profitability.
The review has resulted in higher non-performing loan (NPL) ratios and increased loan loss provisioning expenses. Eight of the 11 public sector banks (PSBs), rated by Moody's, posted a net loss for the full fiscal. The remaining three reported a significant decline in profits.
"We expect the capitalisation profile of the PSBs to further deteriorate, unless the government provides additional capital support," the ratings agency said.
These banks' asset quality will remain under pressure
over the next 12 months, as they continue to recognize NPLs from some of the larger leveraged corporate groups, particularly in the steel and power sectors.
"As a result, elevated provisioning expenses will continue to constrain profitability and limit internal capital generation," Moody's said.
The total loss of Rs 20,200 crore for 2015-16 more than offset the Rs 19,200 capital injection received from the government over the same period.
This result is in sharp contrast to the Rs 29,100 crore profit reported by the 11 banks in 2014-15.
"As a result, elevated provisioning expenses will continue to constrain profitability and limit internal capital generation," said Alka Anbarasu, a Moody's Vice President and Senior Analyst.
Furthermore, the fact that most bank shares are currently trading below book value constrains their ability to use public offerings to raise capital.
Moody's analysis assumed that the banks will see an average net new NPL recognition rate of 1.3 per cent between 2016-17 and 2018-19, including slippages from their restructured loans.
Also credit costs will remain fairly high, at an average of 1.6 per cent and they will raise their loan loss coverage by more than 70 per cent.
