State-run banks will need Rs 35,000-40,000 crore of additional capital: S&P

Global rating agency Standard and Poors (S&P) on Wednesday said that public sector banks in India would need additional capital of Rs 35,000-40,000 crore in the current financial year and barring the State Bank of India and a few large PSBs, most will need capital infusion from the government and government-owned enterprises due to low market valuation.

The large capital raising exercise across Indian financial institutions -- private banks, PSBs and finance companies -- support the system's stability during these rocky times. The investors and stakeholders believe that capital raising is necessary for bolstering the resilience of institutions and instilling confidence that banks can withstand the economic slump, S&P said in a statement.

The large capital-raising is credit positive. Indian banks that have expressed an intention to raise equity include ICICI Bank (Rs 15,000 crore), Axis Bank  (Rs 15,000 crore), Yes Bank (Rs 15,000 crore), State Bank of India (Rs 20,000 crore), Bank of Baroda (Rs 9,000 crore), and Punjab National Bank (Rs 7,000 crore).  Some banks which recently raised large amounts of capital include Kotak Mahindra Bank (Rs 7,400 crore) and IDFC First Bank (Rs 2,000 crore).

"We believe top-tier Indian private sector banks are adequately capitalised. They are raising further capital to strengthen their balance sheets, unlike state-owned banks, which generally have only small buffers over regulatory capital," said S&P Global Ratings' credit analyst Michael Puli.

Most Indian public-sector banks improved their capitalisation last year, which should provide some support. The common equity Tier-1 (CET1) ratio of public-sector banks was 10.1% as of December 31, 2019, higher than the regulatory requirement of 8 per cent (including a capital conservation buffer). Similarly, the public-sector banks' Tier-1 capital adequacy ratio was 11.1%, higher than the regulatory requirement of 7%.

Government-owned banks in India, in aggregate, will be able to absorb the estimated credit losses without breaching the regulatory minimum, but these banks need capital to grow.

S&P said, "In a base case scenario, where we have factored in 4%-5% credit growth for government-owned banks in the current fiscal year, we estimate these banks need additional capital of Rs 350-400 billion this year." "The banks are likely to hold a buffer above the minimum capital requirement, which could increase the capital they need to raise," it added.

Some finance companies are also looking to bolster capital adequacy to address asset quality issues and improve liquidity. Finance companies that have announced, or have raised capital, include HDFC Ltd (Rs 14,000 crore, part of which will be common equity), Shriram Transport Finance  (Rs 1,500 crore), and Mahindra & Mahindra Financial Services (Rs 3,500 crore).

Larger finance companies, such as HDFC Ltd, are less affected by the current economic conditions and are building a war chest to grow (organically and inorganically) and infuse capital into their subsidiaries and associate, the rating agency said.