Loan growth of state-run banks is likely to be remain at a low 9 per cent over the next three years due to their limited availability of growth capital, warns a report.
"Limited availability of growth capital for public sector banks could pull down their loan growth trajectories to a CAGR of 9 per cent till 2018-19," India Ratings said in a report today.
For mid-sized state-run banks, the growth is likely to be even lower at 8.1 per cent over the next three years, and a few of them even may see their loan books declining.
The report estimates a tier-1 capital need of Rs 1.2 trillion till 2018-19 for banks, including Rs 0.4 trillion of common equity tier-1 (CET 1) and Rs 0.7 trillion in additional tier 1 bonds.
"This is the viability capital required to protect the return on assets at levels at which banks would be able to absorb out expected operating costs over fiscal 2016-17 and fiscal 2018-19," the rating agency said, adding this is over and above the Rs 45,000-crore capital committed by government.
It expects state-run banks to start unlocking value in their non-core investments this fiscal year to shore up capital to meet the Basel III requirements and tackle the elevated provisioning requirements on account of non performing loans ageing.
The report estimates the value of non-core assets of public sector banks at Rs 19,500 crore.
It said credit costs are estimated to remain fairly high for state-run banks and impact profitability for this financial year as well as next, with few of them likely to continue to report annual losses this fiscal too.
Quantum of fresh slippages from the large corporate exposure can come down during this and next financial year due to last fiscal asset quality review of the Reserve Bank.
The report expects the improvised non-funded exposure to some of the recognised large stressed accounts, such as iron and steel, to continue to pose a threat to profitability.
The agency said a merger process which releases capital through synergies and enables larger market dominance, particularly in retail liability franchise, could be credit positive for some mid-sized state-owned banks.
"For any consolidation to be beneficial, the standalone sustainability of the merged entity is critical," the report said.
It further said as the state-run banks reduce their loan growth, the unintended benefit could be an improvement in the funding profile, especially for mid-sized banks.
