BackPSB loans set for slowest growth in two decades: India Ratings
PSB loans will expand at a compound annual growth rate of 9% over these years, says India Ratings and Research
Premium
Mumbai: Limited availability of growth capital for public sector banks (PSBs) will mean that the loan book of these banks will expand at the slowest pace in two decades in the between fiscal 2016 and 2019, India Ratings and Research (Ind-Ra) said in a report released on Wednesday.
The rating company predicted that PSB loans will expand at a compound annual growth rate of 9% over these years. The growth will be even slower at 8.1% CAGR for mid-sized PSBs, the report said.
Domestic banks have seen a surge in bad loans over the past year following an asset quality review conducted by the Reserve Bank of India (RBI). This has meant that banks have had to set aside far more capital to cover the risk of default on bad loans.
The government had committed to infusing ₹ 70,000 crore into state-run banks between fiscal 2016 and fiscal 2019 but that capital is unlikely to be enough and could force banks to cut back on growth in their loan books.
This reduced flow of credit could hurt a pick-up in the economy in fiscal 2018 and fiscal 2019.
“The reduced credit availability from banks could further tighten the funding needed for an economic pick-up," said the rating agency. “Ind-Ra’s expectation of limited credit demand beyond the refinancing requirements of levered corporates appears to be largely in line with the estimated credit supply for FY17. However, a sustained moderation in PSBs’ credit growth is likely to start impacting the nominal GDP pickup for FY18-FY19."
India Ratings estimates that even at this projected low rate of growth in loans, public sector banks will still require Tier-1 capital of ₹ 1.2 trillion over financial years 2016-17 to 2018-19. This requirement includes ₹ 40,000 crore in common equity tier-1 and ₹ 71,000 crore in additional tier-1 (AT-1) bonds, the report says.
There will be considerable pressure on bank balance sheets in the near term as a sizeable proportion of the bad loans accumulated by state-owned banks after the Reserve Bank of India’s (RBI) asset quality review, is likely to attract higher provisioning over the next two financial years.
As per RBI rules, an account is classified as an NPA when payments are overdue for more than 90 days. Once this is done, banks need to set aside money to cover 25% of the loan amount in the first year. By the fourth year, banks have to provide 100% against these assets unless they are upgraded to standard accounts.
Public sector bank profitability will also be affected due to aging non-performing assets (NPAs), the report said. Owing to the rising levels of bad loans, the credit cost on bank books is likely to stay at elevated levels of 170-180 basis points (bps) in financial year 2016-17. This level of credit cost is still lower than 280 bps a year ago. One basis point is one-hundredth of a percentage.
As a result of these pressures, India Ratings believes that, barring a few large state-owned banks, most lenders will look to consolidate their balance sheets, reduce risk-weighted assets, and preserve capital.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
