PSBs require Rs.450-825bn capital
Investors’ interest in public sector banks (PSBs) will continue to remain weak amid prevailing uncertainties made worst by COVID-19 pandemic.
Commenting on these developments, Anil Gupta, Sector Head – Financial Sector Ratings, ICRA Ratings elaborated, “With thin capital cushions and an expected increase in stress on asset quality and profitability, we expect PSBs to require Rs.450-825 billion of capital even under a scenario of low credit growth of 3-4% during FY2021.
“Further, the investors’ appetite towards these banks will continue to remain weak amid prevailing uncertainties” added Gupta.
ICRA also projects the incremental credit growth of banks during FY2021 to be Rs.6.0-7.0 trillion during FY2021 (Rs.5.9 trillion during FY2020) which will translate in a Y-o-Y credit growth of ~6.0-7.0%.
This will be driven by 3.5-4.3% growth by PSBs and 7.0-9.0% by Private Sector Banks (PVBs).
The few factors that could drive credit growth further will be the sovereign guarantee on loans extended to MSMEs, capitalisation of interest on loans under moratorium and expected slowdown in external commercial borrowings, said ICRA.
Private banks are also expected to also raise capital to maintain higher capital ratios (cushion of 1.50-2.0% over regulatory Tier-I requirement of 9.5%) to absorb any asset quality related shocks.
Accordingly, the estimated capital requirement for private banks will be between Rs.250-483 billion over FY2021-FY2022.
“In our view, some of the mid-sized banks though appear to have limited capital requirements, however, it could be large in relation to their market capitalization,” said Gupta.
“The capital requirements for the larger and stronger banks are comfortable in relation to their market capitalisation and their ability to raise capital as per current estimates should not be a challenge,” avers Gupta.
Further, some of the large private banks have issued sizeable quantum of Additional Tier-I (AT-1) bonds and options for around Rs.260 billion fall due during FY2022 and FY2023.
The investor appetite for these bonds has weakened in the recent past and if the banks were to maintain similar capital cushions at Tier 1 level, the banks will also need to replace these bonds with core equity capital, which will add to their capital requirements, according to ICRA. fiinews.com
