Challenges mount for PSBs as performance deteriorates: India Ratings

Any dilution in govt's stance on equity injection due to fiscal pressures could have an immediate impact on the ratings of weak banks

India Ratings & Research said public sector banks (PSBs) would depend more on equity injections from the government, as their capital ratios could be impacted by falling internal accruals, together with pressure to grow the loan portfolio.

The government has been very supportive so far, which provides a strong support floor to the Long-Term Issuer Ratings of government banks. Any dilution in the government’s stance due to fiscal pressures could have an immediate impact on the ratings of weak banks, India Ratings stated.

Banks’ deteriorating performance also brings the role of hybrid debt capital in absorbing losses under focus. The market for Basel-III Tier-II instruments is a fledgling one in India and investors will benefit if the Reserve Bank of India (RBI) articulates a framework for invoking losses on the investors.

PSBs overwhelmingly depend on the government for equity. The government and its wholly owned Life Insurance Corporation of India injected about 95 per cent of the new equity into these banks between FY10 and FY13.

The Prime Minister’s Economic Advisory Council recently suggested  the government dilute stake in its banks to raise Rs 55,000 crore for equity injections.

Clearly, the government is trying to balance between managing the fiscal deficit, maintain confidence in its banks that control about 70 per cent of the system of assets, and rein in the moral hazard of continuing to support banks that are less efficient, it said.      

The situation has deteriorated rapidly for weak banks — quarterly losses in the Central Bank of India and United Bank of India during the September quarter were equivalent to about 10 per cent of their equity.

Provisions for rising non-performing loans (NPLs) were the largest contributors to the losses and might remain elevated for the next two quarters, given the weak operating environment and the banks’ low loan loss reserves, of under 50 per cent of gross NPLs.