NEW DELHI: Indian banks’ non-performing assets (NPAs) are set to balloon over the next two years, estimates Moody’s Investors Service. Raising concern about the profitability profiles of Indian banks, the credit ratings agency said capitalisation will remain a weak spot for lenders in the country.
In its report titled ‘Indian banks’ capitalisation profiles worsen; asset quality outlook remains weak’, released on Thursday, Moody’s said Indian banks will need up to Rs 95,000 crore additional capital over the next two years.
Public-sector banks have limited ability to raise external capital and hence infusion by the government remains the only viable source for shoring up capital base, Moody’s noted in the report.
The asset quality outlook for the banking sector will remain weak, said ICRA, Moody’s Indian affiliate. It estimates gross NPAs to swell to Rs 8.2 -8.5 lakh crore (9.9-10.3 per cent of total advances) by the end of FY18 from Rs 7.65 lakh crore (9.5 per cent) at the end of March 2017.
Moody’s estimate of Rs 95,000 crore is much more than the Rs 20,000 crore budgeted by the central government towards capital infusion until March 2019. Under the government’s Indradhanush plan for bank recapitalisation, Rs 70,000 crore was to be infused in state-owned banks beginning 2015. Of this, the government has already pumped in Rs 50,000 crore and the remaining will be infused by the end of 2018-19.
Under the plan, public-sector banks will raise Rs 1.10 lakh crore from the markets, including follow-on public offers, to meet Basel-III capital adequacy norms, which kick in from March 2019.
While it expects credit costs to stay broadly in line with the levels during the last fiscal, Moody’s does not expect any material improvements in the banks’ profitability profiles over the next two years.
Because the pace of NPA resolutions is sluggish, ICRA’s outlook on the banks’ asset quality remains weak, even as the pace of fresh NPA generation slows. ICRA estimates the fresh NPA generation at 5.5 per cent for FY17 compared to six per cent for FY16. According to the agency, the stressed assets for the banking system stood at estimated around 16-17 per cent as on March 2017.
Meanwhile, Moody’s noted the recent Ordinance issued by the government for amendment in the Banking Regulation Act of 1949 is a positive for the banks, because it highlights the urgency and the willingness of the government to resolve the stressed asset challenges of the banking system.