Indian public sector banks will find it difficult to maintain capital adequacy ratios unless the government provides more money to them to cover bad loans, ratings agency Moody’s has said.
Indian state-owned banks are facing mounting bad loans, called non-performing assets or NPAs, as the country’s economy slows down and corporate clients are unable to service their loans.
“Without sufficient government capital infusions, public-sector banks will be challenged to maintain minimum Tier 1 ratios of 8%,” Moody’s said .
“Most other public-sector banks trade at valuations below SBI, indicating that markets are not yet receptive to further equity offerings from these banks. There are also caps on the equity exposure of Life Insurance Corporation of India (Baa3 stable), a state-owned insurer that provided INR75.6 billion of equity to rated public-sector banks in fiscal 2012,” Moody’s said.
In his interim budget, outgoing finance minister P Chidambaram had provided for funding of 11,200 crore to public sector bank to account for corporate and other defaults on loans.
“The allocation is credit negative for public-sector banks because it is much smaller than the INR250-INR360 billion ($4.1-$5.8 billion) that we estimated the banks needed to meet a minimum Tier 1 ratio of 8% in the fiscal year ending March 2015. Our estimates assume the banks make adequate provisions to meet a minimum 70% coverage ratio under a range of potential asset-quality outcomes,” Moody’s said.
Moody’s blamed the increase in non-performing loans (NPLs) to the country’s slowing economy and infrastructure bottlenecks, and said profits are insufficient to fund loan growth.
As of December 2013, rated public-sector banks reported an average gross NPL ratio of 4.3%, up from 3.4% in March 2013. “We expect them to continue rising in fiscal 2015. The 90 basis point increase in the March-December 2013 period exceeds the average increase of 50 basis points for the fiscal year ended March 2013 and 78 basis points for fiscal 2012.”
Bad loan provision costs rose to 65% of public-sector banks’ pre-provision income for the first three quarters of the fiscal year from 49% a year earlier, Moody’s said. Indian public-sector banks’ loan-loss reserves remain lower as a percentage of gross NPLs than those of private-sector banks or banks in other emerging markets, it added.