Mumbai: Moody’s Investor Service on Thursday said India’s large state-owned banks will need up to Rs95,000 crore of equity capital, highlighting a key challenge facing the country’s banking system, 70% of which is accounted for by state-owned banks.

Moody’s expects the stock of bad loans at these banks to rise in the next two years, squeezing profits further. “We estimate that the 11 Moody’s-rated public sector banks will require external equity capital of about Rs70,000 crore to Rs95,000 crore," said Alka Anbarasu, vice-president and senior analyst at Moody’s.

According to a report issued by Moody’s, capital infusion from the government will be the only viable source of external equity capital for state-owned banks, given their low equity valuations.

Under the Indradhanush plan, the government had promised to infuse Rs10,000 crore each in banks this financial year and next. Except State Bank of India, all state-owned banks have a price to book value below one, making it tough for them to raise capital from the market.

“Smaller public sector banks will find it tough to raise capital through markets given the current pressure in their asset quality. Once large 40-50 stressed accounts are resolved, banks involved in the consortium will need to take haircuts and make provisions accordingly, eroding their profits," said Siddharth Purohit, senior banking analyst at Angel Broking Ltd.

According to Moody’s, gross non-performing assets (NPAs) for the industry, which stood at 9.5% at the end of the March quarter, are expected to increase to Rs8.2-8.5 trillion or 9.9-10.3% by March 2018.

Moody’s India affiliate Icra Ltd said the recent ordinance to tackle NPAs is positive for the banks, but added their limited profitability and capital availability will make it tough for them to absorb haircuts stipulated by the committee.

Banks are looking to sell non-core assets to shore up their capital base. IDBI Bank last week said it plans to sell Rs5,000 crore of non-core assets in 2017-18.

According to Anbarasu, it won’t be easy for state-owned banks to sell non-core assets because this usually happens through bilateral deals (which are not easy for a state-owned firm to strike).

“There will be merger of smaller banks with the larger ones initially, and then, banks will look out to raise capital. Gross NPAs in absolute terms will increase in the coming year, but resolutions will speed up which will increase overall asset quality of the balance sheet," said Ashutosh Mishra, banking analyst at Reliance Securities Ltd.

Press Trust of India reported on 5 June that state-owned banks including SBI, Bank of Baroda and IDBI Bank plan to raise Rs58,000 crore through equity dilution in 2017-18 to meet capital adequacy norms and clean up their balance sheets.

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