MUMBAI: The worst seems to be far from over for public sector banks (PSBs). Gross non-performing assets (NPAs) will likely peak in 2018 and provisioning will continue to bleed banks, which will take ‘appropriate’ haircuts next fiscal, according to a Moody’s-ICRA joint report.
While the incoming Rs 2.1 lakh crore bank recapitalisation plan will narrow the capital profile gap between public and private lenders, the increasing number of PSBs falling under the Reserve Bank of India’s Prompt Corrective Action (PCA) framework could delay the much-needed credit offtake. Currently, 11 out of the 21 PSBs are under PCA, with Allahabad Bank being the latest to the join the roster.
According to Moody’s, the average common equity tier-1 ratio of rated PSBs was 8.7 per cent compared to 12.2 per cent for private players as of September 2017. “The capital infusion will help PSBs build their provisioning coverage ratios as they will be able to allocate much of their operating profits towards loan-loss provisioning without having to worry about the impact on their capital positions,” said Alka Anbarasu, vice-president and senior analyst, Moody’s. She added that banks will achieve an average provision coverage of 70 per cent by FY19, allowing them to take appropriate haircuts, implying a thorough clean-up of balance sheets.
Accordingly, Moody’s believes recapitalisation will facilitate NPA resolution and Basel III implementation, besides strengthening the government’s position to push reforms on corporate governance and consolidation. Once adequate with capital, PSBs may regain market access and the ratings agency believes there’s scope to reduce the government’s shareholding in PSBs.
Meanwhile, ICRA estimates fresh slippages of Rs 2.5-3 lakh crore in FY18 and after adjustment for recoveries/upgrades and write-offs, gross NPAs may increase to Rs 8.8-9 lakh crore by FY18 against Rs 7.65 lakh crore in FY17.
“For PSBs, credit provisions are estimated to increase to Rs 2-2.2 lakh crore during FY18 from Rs 1.6 lakh crore during FY17,” said Karthik Srinivasan, group head for financial sector rations, ICRA. With provisioning higher than operating profitability, ICRA estimates PSBs’ losses at Rs 30,000-40,000 crore during FY18 against Rs 7,000 crore in FY17. With one-third of gross NPAs already under resolution, credit provisioning surged during Q2 of FY18 with a 30 per cent increase over last year. PSBs account for almost 88 per cent of gross NPAs.