No early exit for banks under PCA till FY20 despite fresh capital: Icra

The 11 public sector banks (PSBs) under the prompt corrective action (PCA) framework are unlikely to get an exit before FY20, despite the government’s capital infusion plans, ratings agency Icra has said. 

“With net NPAs of 11.2 per cent as on September 30, capital ratios below the regulatory thresholds and high chances of losses during FY19, the exit for PCA banks appears difficult based on existing regulations and the expected financial performance of FY19,” said Karthik Srinivasan, group head, financial sector ratings, Icra. Icra expects all PCA banks to report cumulative losses of Rs 490 billion during FY19. 

“Even if the government infuses capital in few PSBs to shore up their capital ratios and reduce their net NPAs below six per cent, PCA PSBs will fail to meet this criterion to exit PCA,” said Icra.

Icra expects further capital infusion of Rs 135 billion in PCA banks during FY19 with capital infusion of Rs 119 billion till now. It expects that the bank recapitalisation plan for FY19 to remain unchanged at Rs 650 billion, as the capital support during the current year was restricted to only PSBs that were breaching or likely to breach the regulatory capital ratio of nine per cent.

The recent relaxation in capital conservation buffer framework and Life Insurance Corporation of India-IDBI Bank deal would obviate the need of capital support. The softening in bond yields and consequent reversal of mark-to-market losses on bond portfolios, coupled with reduction in risk weighted assets by PSBs is also expected to lower the capital requirements of PSBs despite sizeable losses estimated for FY19, it added. 

Icra expects these recent events to potentially reduce the GoI’s capital support to PSBs by up to Rs 450 billion.