Capital requirements for banks are set to rise amid increasing asset quality pressures, with Gross Non-Performing Assets (GNPAs) expected to swell to 11.3 to 11.6 per cent by March-end 2021 from 8.6 per cent as on March-end 2020, according to credit rating agency ICRA.
The agency assessed that with thin capital cushions and expected increase in stress on asset quality and profitability, public sector banks (PSBs) will need an estimated capital infusion of ₹45,000 to ₹82,500 crore against the earlier estimated ₹10,000 to ₹20,000 crore even under a scenario of low credit growth of 3 to 4 per cent in FY21.
Private banks are also expected to also raise capital to maintain higher capital ratios (cushion of 1.50 to 2.0 per cent over regulatory Tier-I requirement of 9.5 per cent) to absorb any asset quality related shocks. Accordingly, ICRA estimated capital requirement for private banks will be between ₹25,000 to ₹48,300 crore over FY21 to FY22.
It observed that PSBs’ credit provisions will continue to exceed the operating profits during FY21, translating in a sixth consecutive year of loss.
ICRA estimated GNPAs to rise to 11.3 to 11.6 per cent by March 2021, with a fresh gross slippage of 5.0 to 5.5 per cent of standard advances during FY21 (about 4.2 per cent estimated in FY20).
High uncertainty
The agency assessed that the uncertainty on the asset quality of banks remains high with almost 30 to 40 per cent of loan book across various banks under moratorium announced by the Reserve bank of India (RBI).
Further, while the lockdown has surely impacted the debt servicing ability of borrowers, the extent of revival in economic activities as restrictions are eased, will drive the final impact on asset quality of banks. Even if 10 to 20 per cent of these borrowers were to default, the slippage rate for banks could rise to 3 to 8 per cent of advances.
Anil Gupta, Sector Head – Financial Sector Ratings, ICRA Ratings, said: “The RBI moratorium to borrowers was extended by another three months till August 31, and we expect the asset quality stress is likely to reflect only in Q3 (October-December) FY21 and Q4 (January to March) FY21 results.
“The ability of the borrowers and lenders to control the forward flows in overdue buckets will remain critical to prevent a sharp rise in NPAs.”
Impact on earnings
The agency cautioned that with expectations of higher slippages, the credit provisions for banks are likely to rise and have adverse impact on their earnings.
While the credit provisions will continue to exceed the operating profits for PSBs during FY21, the profitability of private sector banks (PVBs) will also moderate with return on equity (RoE), declining to 3.5 to 5.1 per cent during FY21, against earlier expectations of improvement to 10 to 12 per cent, the agency said.
ICRA said the capital requirements for PSBs was earlier estimated at ₹10,000 crore to ₹20,000 crore for FY21, based expectations of improved asset quality and profitability, and the government had expected them to raise capital from markets and, hence, possibly did not budget any capital infusion for FY21.
The agency said investors’ appetite towards PSBs will continue to remain weak amid prevailing uncertainties.
ICRA underscored that some of the large private banks have issued sizeable quantum of Additional Tier-I (AT-1) bonds and options for around ₹26,000 crore fall due during FY22 and FY23.
The agency observed that investor appetite for these bonds has weakened in the recent past and if banks were to maintain similar capital cushions at Tier 1 level, lenders will also need to replace these bonds with core equity capital, which will add to their capital requirements
Credit growth
ICRA has projected the incremental credit growth of banks during FY21 to be ₹6-lakh crore to ₹7-lakh crore during FY21 (₹5.9- lakh crore during FY20), which will translate in a year-on-year credit growth of about 6 to 7 per cent. This will be driven by 3.5 to 4.3 per cent growth by PSBs and 7 to 9 per cent by PVBs.
The few factors that could drive credit growth further will be the sovereign guarantee on loans extended to MSMEs (micro, small and medium enterprises), capitalisation of interest on loans under moratorium, and expected slowdown in external commercial borrowings, the agency said.