The Rs 2.1-trillion fund infusion plans for the capital-starved public sector banks is likely to reduce gap in their capital profiles with their private sector peers, says a report. The report also predicts that bad loan issues that the banks face today may peak by this fiscal year. Gross bad loans of the system has crossed 10.2 per cent or Rs 10 trillion by the December quarter and RBI has warned that it will cross 11.1 per cent by the next September quarter.
Last October, government had announced a capital allocation plan for public sector banks to the tune of about Rs 2,11,000 crore over the next two years. Of this Rs 18,139 crore will be met through budgetary provisions, and Rs 1.35 trillion through recapitalisation bonds.
“State-run banks’ weak capital profile is their key credit weakness in comparison to their peers in the private sector. As of September 2017, average common equity tier 1 (CET1) ratio of the state-run lenders was 8.7 per cent compared to 12.2 per cent for private sector banks. But the gap is expected to narrow with the recapitalisation,” Alka Anbarasu, a vice-president and senior analyst at global rating agency Moody’s said in a note on Thursday.
She, however, did not quantify by how much the gap will narrow for the harried state-run banks. The Government will allocate the Rs 1.5 trillion capital across the 21 public sector banks so that they will all have (CET1 ratios above the minimum Basel-III requirements of 8 per cent by the end of March 2019, it said.
“Capital infusion will also help these lenders build their provision coverage ratios as they will be able to allocate much of their operating profit towards loan-loss provisions without having to worry about the impact on their capital positions,” Anbarasu said.
She expects the banks to achieve an average provision coverage of 70 per cent by FY19, allowing them to take appropriate haircuts on problem assets. With much greater visibility regarding their future receipt of adequate capital from government, it’s possible that these banks may also regain market access, she said.
In the same report, Moody’s domestic affiliate Icra said bad loans may peak by FY18, but elevated levels of provisioning on these bad loans will continue to negatively affect banks in FY18 and FY19.