State-run banks need Rs 95,000 crore fresh capital

Mumbai: Moody’s Investors Service on Thursday said that the weak capitalisation levels will remain a key credit weakness for Moody’s rated Indian public sector banks, particularly in the context of the increasing requirements for equity under Basel III and the limited ability of the banks to raise external capital.

However, the rating agency has maintained its stable outlook for Indian non-financial corporates arguing that a revival in consumption demand, lower input costs and structural reforms will support a gradual recovery in the corporate sector.

Moody’s India affiliate, Icra added that the asset quality outlook for the Indian banking sector will remain weak, despite the moderation in the formation rate of fresh non performing assets.

“We estimate that the 11 Moody’s-rated public sector banks will require external equity capital of about Rs 70,000 crore –Rs 95,000 crore, or about $10.6-$14.6 billion. Such an amount is much higher than the remaining Rs 20,000 crore budgeted by the government towards capital infusion until March 2019,” said Alka Anbarasu, vice president and senior analysts at Moody’s.

Moody's analysis assumes that the stock of impaired loans will increase during the horizon of this outlook, but at a slower pace versus the last two years. Moreover, the agency expects credit costs to stay broadly in line with the levels during the fiscal year ended March 31, 2017.

Consequently, Moody's does not expect any material improvements in the banks’ profitability profiles over the next two years.

While many PSBs have announced plans to raise external capital (equity and additional tier 1 capital) in FY2018, Moody’s believes that capital infusions from the government remain the only viable source of external equity capital, because of the public sector banks' low capital market valuations, which would likely continue to deny them the option of raising fresh equity from the capital markets.