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Photo: Hemant Mishra/Mint
Photo: Hemant Mishra/Mint

Covid-19 Impact: Banks to feel capital pinch as asset quality to take hit

  • The impact will be more pronounced for PSBs, where the Centre has not proposed any capital infusion for FY21
  • The government had infused 70,000 crore into state-owned banks in fiscal 2020

MUMBAI: The 21-day nationwide lockdown to contain the spread of coronavirus (covid-19) leading to sluggish economic growth and the consequent rise in provisions for bad loans will exert pressure on the capital adequacy of banks, ratings agencies have warned.

The impact will be more pronounced for public-sector banks (PSBs), where the Centre has not proposed any capital infusion for the financial year started 1 April and expects them to tap markets for funds. Ratings agency Moody’s Investors Service went to the extent of revising the outlook for the Indian banking system to negative from stable earlier.

According to Moody’s, surge in loan loss provisions along with a decline in revenue will hurt the profitability of banks, causing a deterioration of capitalisation. It said if the government makes more capital infusions into PSBs, as it had in the past few years, it will mitigate capital pressure for them.

“However, the government so far has not announced any new plan to provide capital support to PSBs. Most rated private sector banks will maintain strong capital buffers," it said.

The government had infused 70,000 crore into state-owned banks in fiscal 2020. In FY19, it had infused over 1 trillion in PSBs, with last tranche of 48,239 crore in February 2019 and helping six banks to exit the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework.

Moody’s also said a deterioration in global economic conditions and India’s 21-day lockdown will weigh on domestic demand and private investment. Credit supply to the economy will be hampered by volatility in global financial markets and heightened risk aversion among Indian banks and debt market participations.

Meanwhile, ratings agency ICRA also said the delinquency numbers for banks as well as for non-banks are going to increase in FY21 and this would have an impact on their financials.

ICRA group head of financial sector ratings Karthik Srinivasan said the capital profiless of a lot of lenders are expected to suffer.

“We believe that the build-up in stressed assets would continue to exert pressure on the capital levels. In the current environment where equity mobilisation is going to be difficult, the rise in NPAs (non-performing assets) and the inability of a lot of lenders to improve their collections could stretch their solvency," said Srinivasan.

By solvency, Srinivasan referred to the ratio of net stressed assets to core equity or net NPAs to core equity. “Both ways, the numbers are going to show a deterioration," he said, adding that regulatory capital adequacy, however, may not be a problem for many because of sluggish credit growth and limited scope to deploy money.

According to ICRA, funding challenges apart, while higher on-balance-sheet liquidity and uncertainty on asset quality could force private lenders to remain cautious on fresh disbursements, public-sector banks may be constrained by their capital position and merger-induced bottlenecks.

Moreover, the absence of any budgeted capital in FY21 will limit banks' credit growth to 6% even as the RBI has deferred the increase in capital requirements.

Non-food credit stood at 100.8 trillion, a growth 6.07% year-on-year (y-o-y) for the fortnight ended 13 March, RBI data showed.

Last year, RBI had suggested that state-owned banks’ dependence on the government for capital should end.

In its report on Trend and Progress of Banking in India released in December, the central bank had said the government has been infusing capital in some PSBs, just enough to meet the minimum regulatory requirement including capital conservation buffer (CCB). It had said the financial health of PSBs should increasingly be assessed by their ability to access capital markets in the coming years instead of the tendency to depend excessively on the Centre.

In January, India Ratings and Research had placed most PSBs under rating watch evolving. The ratings agency had said though the amalgamation of 10 PSBs into four could give them economies of scale in the long run, credit growth and asset recovery could suffer in the short term.

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