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27
February 2019
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Bank
(The Total Investment & Insurance Solutions)
The
Indian government's announcement to inject $7 billion into public sector banks
(PSBs) under its recapitalisation plan is likely to help banks meet minimum
regulatory requirements, but is not sufficient to support significantly
stronger lending growth, says Fitch Ratings.
In a
note, the ratings agency says, "A large proportion of the government's
latest round of recapitalisation is still likely to go towards addressing
regulatory shortfalls rather than to support asset growth. More will be needed
as a cushion against future losses at some state banks, as borrower defaults
and slow bad loan resolution continue to put pressure on non-performing loan
(NPL) provisions."
"PSBs'
provision cover ratio was around 50% at end-September, still short of the 65%
that we believe may ultimately be needed. Much of the capital already injected
by the government into state banks over the last few years has been consumed by
large financial losses caused by loan loss provisions," it added.
Fitch
Ratings estimate that banks will need an additional $23 billion in 2019, after
these latest injections, to sufficiently meet minimum Basel III capital
standards, achieve 65% NPL cover, and leave surplus capital for growth. Capital
needs have fallen from estimate of $65 billion in September 2017, but progress
has not been significant enough to spur loan growth, it added.
According
to Fitch, the Indian authorities' approach to the banking sector has clearly
shifted towards spurring lending in recent months.
Last
month, the Reserve Bank of India (RBI) deferred implementation of the final
tranche of the capital conservation buffer (CCB) of 0.625% to end-March 2020.
The RBI has also lowered risk weights for some lending to non-bank financial
companies (NBFCs), despite these companies facing increased liquidity stress in
the past year.
These
steps, along with capital injections, have eased but not removed capital
constraints on state banks' growth, Fitch says, adding, "Six of the 12
state banks that are due to receive the latest government capital injections
were below the 7.375% minimum common equity Tier 1 requirement as of
end-December 2018. Three more are below the 8% requirement that will apply from
end-March 2020, assuming there are no further deferments of CCB
implementation."
The
injections have allowed Allahabad Bank and Corporation Bank to leave the RBI's
prompt corrective action (PCA) framework, following earlier exits by Bank of
India, Bank of Maharashtra and Oriental Bank of Commerce.
"This
frees these banks from tight restrictions on their management and growth.
However, leaving the PCA framework will not remove the constraints on growth
imposed by weak capitalisation, unless the state injects more capital into
these banks or there is strong turnaround in profitability that support
internal capital generation, which looks unlikely," the ratings agency
says.
The
Indian government had announced a $32 billion recapitalisation programme in
October 2017, split between the fiscal year ending March 2018 (FY18) and FY19.
It planned to provide $21 billion by issuing recapitalisation bonds and $3
billion from the budget, leaving the rest to be raised by banks from the equity
capital markets.
However,
Fitch says many state banks have been unable to access capital markets, and the
government announced in December 2018 that it would provide an additional $6
billion. The latest injections represent the remainder of these previously
allocated funds.
Fitch
has a negative sector outlook on Indian banks to reflect the near-term
pressures from the sector's NPL stock and elevated credit costs on bank
earnings and capitalisation.
"Absolute
NPL and gross NPL ratios fell slightly in the nine months to December 2018
across many banks, but credit costs continue to outweigh weak income buffers.
We expect continued weakness in the near term, although substantial resolution
of bad assets could put banks on a faster path to recovery," the ratings
agency concluded.The Total Investment
& Insurance Solutions
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