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gross bad loan ratio or aggregate bad loans as a percentage of total loans is likely to stay in the range of 11.3-11.6% by March 2021 compared with an estimated 8.6% in FY20, Icra said. (Photo: Mint)
gross bad loan ratio or aggregate bad loans as a percentage of total loans is likely to stay in the range of 11.3-11.6% by March 2021 compared with an estimated 8.6% in FY20, Icra said. (Photo: Mint)

Lockdown impact: Public sector banks need 45,000-82,500 crore capital in FY21

  • With worn out capital cushions and expected increase stress on asset quality and profitability, PSBs will require 45,000-82,500 crore capital even in a scenario of low credit growth of 3-4% during FY21

MUMBAI: India’s public sector banks will require 45,000-82,500 crore of capital in FY21 as the covid-19 pandemic is expected to increase asset quality pressures, said rating agency Icra.

According to a report by Icra on Thursday, with earlier expectations of improved asset quality and profitability, the capital requirements for public sector banks (PSBs) was estimated at 10,000-20,000 crore for FY21 and the government had also expected PSBs to raise capital from markets.

However, now with worn out capital cushions and expected increase in stress on asset quality and profitability, PSBs will require 45,000-82,500 crore of capital even in a scenario of low credit growth of 3-4% during FY21.

“Further, the investors’ appetite towards these banks will continue to remain weak amid prevailing uncertainties" said Anil Gupta, sector head (financial sector ratings), Icra.

Private banks are also expected to raise capital to maintain higher capital ratios (cushion of 1.5-2% over regulatory tier-I requirement of 9.5%) and absorb asset quality related shocks. Accordingly, the estimated capital requirement for private banks will be 25,000-48,300 crore during FY21-FY22.

Icra also said the incremental credit growth of banks during FY21 will be 6-7 trillion, up from 5.9 trillion during FY20, which will translate in a year-on-year credit growth of about 6-7%. The factors that could drive credit growth will be the sovereign guarantee on loans extended to small businesses, capitalisation of interest on loans under moratorium, and expected slowdown in external commercial borrowings, the rating agency said.

“In our view, some of the mid-sized banks though appear to have limited capital requirements, however it could be large in relation to their market capitalisation. The capital requirements for the larger and stronger banks are comfortable in relation to their market capitalisation and their ability to raise capital as per current estimates should not be a challenge" said Gupta.

That apart, gross bad loan ratio or aggregate bad loans as a percentage of total loans is likely to stay in the range of 11.3-11.6% by March 2021 compared with an estimated 8.6% in FY20, Icra said.

The rating agency said uncertainty about asset quality of banks remains high with almost 30-40% of loan book across various banks under moratorium announced by the Reserve bank of India (RBI).

Further, while the lockdown has hit the debt servicing ability of borrowers, the extent of revival in economic activities as the restrictions are eased will drive the final impact on asset quality of banks, said Icra. According to the rating agency even if 10-20% of these borrowers were to default, the slippage rate for banks could rise to 3-8% of loans.

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