The credit profiles of India’s public sector banks are reporting severe losses, and without the needed strengthening of capital in a quick fashion, this could negatively impact the banks’ ability to pursue credit growth.
Indeed, few current options for private-sector capital exist in India as the “government remains the most importance source of new capital for the sector,” notes Fitch Ratings in a report today on Indian banks’ credit profiles. And when bank lending tightens, companies rely more heavily on their suppliers and tend to seek to stretch lending terms or request more favorable terms.
For many public-sector banks, core capital ratios are close to or below the Basel III financial year 2019 minimum regulatory requirement of 8%—with poor earnings outlooks, this banking sector is also “unlikely to build capital through internal capital generation …,” the ratings agency said. Public-sector banking losses more than doubled the government’s capital injection in fiscal year 2016, leading to more need for additional external capital, or some $140 billion. And with only about $500 million in additional Tier 1 capital issuance, “… the sector’s requirement for new capital needs to be addressed to meaningfully kick-start credit growth to lend support to the economy,” Fitch Ratings economists said.
Further, government banks have an average non-performing loan-to-equity ratio of around 70%, compared to about 8% for private Indian banks, according to Fitch.
Fortunately, India's new Insolvency and Bankruptcy Code could work to loan resolution timeframes if it’s implemented in a timely and effective way, Fitch Ratings said. “The government's intention is encouraging, according to recent press reports, but it will take time to see whether the new code can help resolve the current non-performing loan (NPL) stock, especially since the broader economy remains relatively uncertain. The Reserve Bank of India's recent discussion paper on limiting banking sector exposure to individual corporate borrowers, when implemented, could further reduce systemic risk by limiting concentration risk to large corporates.”
- Nicholas Stern, editorial associate