Public sector banks will need Rs 2.1 lakh crore to plug capital shortfalls: Moody's

Singapore: The sharp slowdown in India's economic growth exacerbated by coronavirus outbreak will hurt public sector banks' (PSBs) asset quality and drive up credit costs, Moody's Investors Service said in a new report on Friday.

"We expect to see PSBs' already weak capital buffers to be depleted, with Rs 1.9 lakh crore to Rs 2.1 lakh crore in external capital needed over the next two years to restore loss-absorbing buffers," said Alka Anbarasu, Moody's Vice President and Senior Credit Officer.

The most likely source of capital to plug these capital shortfalls is the government despite its completion of a large recapitalisation just a few months ago.

"PSBs dominate India's banking system, meaning any failure could jeopardise financial stability," added Anbarasu. "As such, we expect government support will remain forthcoming."

Moody's base case assumes a sharp contraction in the Indian economy in fiscal 2021 before returning to modest growth in fiscal 2021. Even before the coronavirus outbreak, the economy had already been growing at its slowest pace in six years.

Moody's expects retail and micro, small and medium-sized enterprises (MSMEs) will lead a rise in non-performing loans (NPLs), delaying the ongoing clean-up of legacy corporate NPLs.

PSBs, in turn, will need a substantial amount of external capital to absorb increased credit costs and support further credit growth.

Specifically, Moody's estimates the banks will require about Rs 1 lakh crore to build loan-loss provisions to about 70 per cent of NPLs and a similar amount to grow loans 8 to 10 per cent annually -- faster than the 4 per cent recorded in fiscal 2020 and supporting economic expansion.

Uncertainty surrounding India's economic recovery and the ongoing clean-up of balance sheets are making it difficult for banks to raise equity capital from markets, leaving the government as the obvious source.