New govt will have to inject more capital in PSBs: S&P

Asset quality of banks is likely to remain weak through the next year

Global ratings agency Standard & Poor’s (S&P) on Tuesday said the new government at the Centre would have to inject more capital into public sector banks (PSBs) to ensure these maintained healthy balance sheets, especially in the backdrop of deteriorating asset quality.

However, given India’s sizable fiscal deficit, it would be essential for the next government to balance capital infusion with medium-term fiscal consolidation, S&P said in a report. It added Indian banks faced three key challenges — asset quality problems, sizeable capital needs, especially for PSBs and high financing costs.

State-run lenders, which account for about 70 per cent of assets, need sizeable capital to support growth and meet Basel-III norms. Their reliance on capital infusion by the government was likely to remain very high, the report said. The new government and its policies could play a crucial role in addressing these issues.

“We believe policy reforms in key corporate sectors could affect the banking sector’s asset quality, given loans to the former account for a large part of gross bank credit (industry 45 per cent and services 23 per cent),” the agency said. Policy action could have greater impact on sectors that had a higher degree of corporate debt restructuring, S&P said.

It added the asset quality of banks was expected to remain weak through the next year, as it would take time for policy measures to bring about an improvement in stressed loans.

Banks’ asset quality has weakened because of slow economic growth, high interest rates and the high leverage of companies in distressed sectors. Banks have played a major role in funding projects that require heavy capital expenditure such as those in the power, telecom, road, ports, metals & mining, construction and cement segments.

Asset quality has seen the most stress in the infrastructure segment, which accounts for about a third of stressed cases. The metals & mining, and textile sectors together contribute about 65 per cent to the debt being restructured. Chemicals, construction and ship-building are the other sectors under stress. S&P said between 2005 and 2008, small and mid-sized companies had recorded aggressive debt-funded capital expenditure or acquisitions.

These sectors might require strategic measures and further capital investments, S&P said, adding these were more likely in a growing economy and an improved business climate.