Stressed assets in the banking system is likely to rise to 12.5 per cent by the next fiscal against an estimated 12 per cent in the current financial year, India Ratings said today.
“The impaired asset ratio of the banking system will inch up to 12.5 per cent, including ARC receipts but excluding discom bonds, by FY17,” the agency said in its report on banking sector outlook for the next fiscal.
Stressed assets in this fiscal is estimated to be at 12 per cent as compared with 10.8 per cent in FY 2014-15.
The report said the credit costs are likely to remain high at around 120 basis points, given the low provision coverage as well as the recent push by the RBI to recognise the stress from levered corporates.
It said about one-third of the corporate sector borrowing from banks to be stressed - totalling to 21 per cent of bank credit, of which about half has been recognised currently as impaired in the books - NPLs and restructured.
Though schemes like 5:25, strategic debt restructuring and Uday are likely to help contain headline impaired asset ratio, the stress from highly levered corporates will persist over the next few years, it said.
“Indian banks may need up to Rs 1 trillion over and above the Basel III capital requirements to manage the concentration risks arising out of their exposures to highly levered and large stressed corporates,” the report said.
Of this, public sector banks will need Rs 93,000 crore, which is equivalent to an equity write-down of about 1.7 per cent of the bank’s risk weighted assets, and represent the loan haircut that banks may face to revive the financial viability of distressed accounts.
All these exposures are currently treated as performing and carry a minimal loan loss provision of 5 per cent or less.
RBI has already asked banks to recognise some of these deeply stressed assets as non-performing and to make prudent provisions for them.
The shortfall may significantly increase the government’s equity injection requirement compared to the Rs 70,000 crore announced on July 31, 2015, it said.
The rating agency estimates a capital requirement of Rs 3.7 trillion from FY17 to FY19 for banks including Rs 1.5 trillion in common equity Tier 1 (CET 1) and Rs 1.4 trillion in Additional Tier 1 (AT1) bonds.
Of this CET1 requirement, Rs 1 trillion would be the likely share of the government, assuming no change in their current shareholding of PSBs.
“Government support remains critical for PSBs, given their low internal accruals, eroded equity valuations and risk of further slippage from levered corporates,” it said.
Development of AT1 market would be critical in next fiscal, given the significant requirement and the burden of very weak market appetite in FY 2015-16, it said.
A mere Rs 130 billion of AT1 issuances have taken place so far with insurance and pension funds (which have long-term liability and risk appetite to invest in these instruments) keeping away on account of regulatory hurdles and inadequate price discovery.
The report said assuming 14 per cent CAGR in RWA for large PSBs, the total incremental tier-1 capital requirement is Rs 1.4 trillion (50 per cent CET1, 50 per cent AT1) with a strong frontloaded requirement for AT1 bonds.
While most of these large five PSBs have been proactive in testing the AT1 market with a combined issuance of Rs 65 billion so far, the requirement by FY 2016-17 will be another Rs 250 billion.
Mid-sized PSBs will require Rs 1.2 trillion in total capital by March 2019 (60 per cent CET1 and 40 per cent AT1), despite budgeting for a 12.5 per cent RWA CAGR over FY 2016-19.
The rating agency said most private sector banks continued to improve their funding profile while PSBs reported high ALM gaps in FY 2014-15 and continue to show similar trends as per latest data into FY 2015-16.
It believes that the refinancing capability of government banks remains strong, based on the strengths of their granular deposit bases and funding franchises.
“Banks with large ALM gaps may however witness higher funding costs due to elevated refinancing pressure, compromising their capability to effectively transmit monetary easing,” it said.
The report expects credit growth to pick up to 13.5 per cent next fiscal from an estimated 10.7 per cent in FY 2015-16.