Bank recap may not mean faster loan growth

Mumbai: While the government's $7 billion (around Rs 48,000 crore) capital infusion in state-owned banks under its recapitalisation plan could help banks meet minimum regulatory requirements, it would be insufficient to support significantly stronger lending growth, Fitch Ratings said. Banks would need an additional $23 billion (Rs 1.6 lakh crore) in 2019, after these latest injections, to sufficiently meet minimum Basel III capital standards, achieve 65 per cent non-performing loans (NPL) cover, and leave surplus capital for growth.

The agency noted that the authorities' approach to the banking sector has clearly shifted towards spurring lending in recent months. The Reserve Bank of India (RBI) in early January deferred the implementation of the final tranche of the capital conservation buffer (CCB) of 0.625 per cent to end-March 2020. The RBI has also lowered risk weights for some lending to non-bank financial institutions, despite these companies facing increased liquidity stress in the past year.

“These steps, along with capital injections, have eased but not removed capital constraints on state banks' growth, said Fitch Ratings. Capital needs have fallen from our estimate of $65 billion in September 2017, but progress has not been significant enough to spur loan growth.

Six of the 12 state banks that are due to receive the latest government capital injections were below the 7.375 per cent minimum common equity Tier 1 requirement as of end-December 2018. Three more are below the 8 per cent requirement that will apply from end-March 2020, assuming there are no further deferments of CCB implementation. The injections have allowed Allahabad Bank and Corporation Bank to leave the RBI's prompt corrective action (PCA) framework, following earlier exits by Bank of India, Bank of Maharashtra and Oriental Bank of Commerce.

“This frees these banks from tight restrictions on their management and growth. However, leaving the PCA framework will not remove the constraints on growth imposed by weak capitalisation, unless the state injects more capital into these banks or there is strong turnaround in profitability that support internal capital generation, which looks unlikely,” the agency noted.

The public sector banks' provision cover ratio was around 50 per cent at end-September, still short of the 65 per cent that we believe may ultimately be needed. Much of the capital already injected by the government into state banks over the last few years has been consumed by large financial losses caused by loan loss provisions.