PSBs need four times more capital than govt allocation: Moody's

Lower market valuations was biggest hindrance if PSBs chose to raise fresh equity from markets

With ailing public sector banks (PSBs) finding it tough to raise capital from the market, the government may have to raise equity infusion by almost four-five times over two years, Moody’s Investors Service has said. Thus, the Centre may have to chip in with up to Rs 95,000 crore in FY18 and FY19, up from its initial commitment of Rs 20,000 crore, the rating agency said on Thursday.

PSBs require external capital of about Rs 70,000-95,000 crore to meet the Basel-III capital adequacy norms by March 2019. Though the PSBs have announced plans to raise external capital (equity and additional tier-1 capital), yet the government seemed to be the only viable source of external equity capital for them. 

Lower market valuations was the biggest hindrance if PSBs chose to raise fresh equity from the markets. The only reason these banks have been given a positive rating was because of the positive outlook of the central government, Alka Anbarasu, senior analyst at Moody’s, said. “Unless the banks are able to demonstrate profitable performance in the next few quarters, they won’t be able to go out and raise capital.” 

Under the Indradhanush plan for bank recapitalisation, the government was to infuse Rs 70,000 crore in PSBs, beginning from 2015. Of this, the government has already infused Rs 50,000 crore in the past two fiscals years and the remaining will be pumped in by the end of FY19. According to the plan, PSBs need to raise Rs 1.10 lakh crore from markets, including follow-on public offers, to meet the Basel-III capital adequacy norms, which kick in from March 2019.

Referring to the asset quality of banks, Moody’s and its Indian affiliate ICRA said even though the generation of fresh non-performing assets (NPAs) had slowed down, 86 per cent of the fresh NPAs generated in FY17 came from outside the restructured books and this was a matter of concern.

ICRA has estimated gross NPAs could rise to as high as Rs 820-850 crore by FY18, against Rs 765 crore by the end of FY 17. The overall vulnerable assets were approximately around 15-17 per cent of the total assets as of March 2017. 

Credit growth was expected to pick up in the near future but credit costs would mostly remain in line with the levels during the fiscal year ended March 2017, the rating agency said, adding the average credit cost for the FY18-19 was expected to be around 2.1 per cent. The need to raise the provision of cover against bad loans would lead to a rise in credit costs, the agencies said.