Banks' capital adequacy ratio at six-year low, hit by rising NPAs

PSU banks worst hit with average CAR falling to 10.67% at end of June quarter vs 11.18% in March 2014

With a rise in non-performing assets exerting pressure on their profitability, Indian banks’ capital adequacy ratio (CAR) has fallen in the aftermath of the global economic slowdown of 2008 — to 13 per cent as of March 2014 from 13.88 per cent a year earlier, according to data compiled by the Reserve Bank of India. The ratio — a measure of banks’  capital to their risk — was 13.01 per cent as of March 2008.

Public-sector banks have been the worst hit, with their average capital adequacy ratio falling to 10.67 per cent as of the quarter ended June, compared with 11.18 per cent in March.

The situation is worrisome, as bad loans continue to mount amid a slowing economy, where interest rates have stayed elevated. Gross non-performing assets (NPAs) of public-sector banks increased to 4.1 per cent as of the end of March from 3.6 per cent a year ago. Their net NPA as a proportion of net advances were 2.2 per cent, compared with 1.7 per during the same period a year earlier.

“The obvious choice would be getting rid of the NPAs, which necessitate steep provisioning and prevent new credit growth. But that has not been easy. If the excess statutory liquidity ratio (SLR) — the amount commercial banks are required to maintain in the form of gold or government bonds — is converted into loans as business picks up, the risk weights will further shift from government securities to corporate bonds, making the capital adequacy ratio look even worse,” said Shinjini Kumar, leader for banking and capital markets at PricewaterhouseCoopers India.

Banks are sitting on a pile of restructured assets, with the ratio of recast assets to gross advances standing at 5.9 per cent as of the end of March, compared with 5.8 per cent a year ago. Public-sector banks account for 92 per cent of the sector’s total restructured advances.

Also, public-sector banks will need additional capital to comply with the Basel-III norms. According to government estimates, state-run banks would require Rs 2.4 lakh crore of equity capital by 2018 to meet these norms. The new norms, implemented in phases in India from April 1, 2013, will be fully implemented by March 2019.

Besides, the present government is yet to allocate fresh funds for infusion in public-sector banks this financial year which has compounded these lenders’ woes. P Chidambaram, finance minister in the previous government, had in the interim budget allocated Rs 11,200 crore for capital infusion and the state-run banks were expecting the finance minister to announce additional capital infusion in the Union Budget

These banks are now planning to raise funds from the market through qualified institutional placements/follow-on public offers.

Punjab National Bank Executive Director Ram Sangapure believes raising capital will be comparatively easy now, given that the economy is showing signs of improvement and the markets are bouncing back. “Apart from this, the NPA situation has stabilised a little and all banks are working towards it. With that in place, it will free up more capital and, probably, make the capital adequacy ratio situation better.”

But Kumar says it might not be possible for all banks to raise capital smoothly, despite better sentiment and markets.

“Banks will want to access fresh capital for Basel implementation, supporting provisions and growth and dealing with the new restructuring regime of no forbearance. Some might be able to access capital at reasonable costs, but others who might not would face a worse situation,” Kumar said.