Indian banks will need between $40 bln to $55 bln (Rs 2.8 lakh cr to Rs 3.8 lakh cr) of additional capital to meet the Basel III capital adequacy norms set to come into effect next year, Fitch Ratings said, adding that most of the money will have to be put in by the tax payer.
The banks’ capital, including the money given by the government last year, has been eroded by “mounting bad debt and poor financial performance”, the agency said. Moreover, it added, non-performing loan percentages could continue to climb due to new challenges, including the stress in small and medium enterprises.
Basel III norms are an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. It lays down the minimum requirements for internationally active banks, and the standard is likely to be adopted globally next year, including in India.
However, Indian banks, especially those controlled by the government, are struggling with bad loans due to their past profligacy in lending money to large corporate groups with exercising due caution, and have seen their capital adequacy ratio fall steadily in recent years.
Fitch Ratings said most of the required amount will have to come out the pockets of common tax payers. This is in addition to the Rs 2.1 lakh cr capitalization move announced last year.
Fitch said most of the money put in by the government last year has been eaten away by bad loans, which “led to losses that cumulatively eroded nearly all of the $13 billion in government capital injected in FY18,” it said.
It said Indian banks will need USD40 billion-55 billion in additional capital to meet Basel III requirements by 2019, with state banks requiring the bulk of this amount.
“The state is likely to be forced into providing most of the required capital, since capital raisings remain challenging due to state banks’ weak equity valuations.”
“The capital position of state banks is most at risk, with the core capital ratios of 11 of India’s 21 state banks below the 8% common equity Tier 1 (CET1) regulatory minimum that comes into place at financial year-end March 2019 (FYE19),” it said.
Most of the capital is likely to be used for meeting minimum capital requirements and absorbing NPL provisions, it said.
ARE WE THERE YET?
Fitch said most of the bad loans have been brought out into the open, but the bottom — as far as bad loan percentage — is yet to be hit due to new challenges.
State-owned banks have a combined non-performing loan (NPL) ratio of 15.6%, more than double that of private banks.
“We believe the sector’s legacy problems have been largely recognised, but the system NPL ratio could witness more upside due to residual stress and new risks emerging out of the retail and SME sectors,” it said.
Nevertheless, there have been some signs of an improvement in the banking sector’ performance in the Apr-Jun, it added.
“Indian banks’ 1QFY19 performance improved slightly on declining credit costs and steady loan growth. However, the USD151 billion stock of bad loans remains a risk for the sector’s weak income base, which is vulnerable to ageing provisions and slower non-performing loan resolution.”
Loan growth improved to 10.4% in FY18, from 4.4% in FY17. This improvement was shouldered by a few large banks, and sustaining the growth momentum will be difficult without adequate capital replenishment.