State-run banks may soon need government support as the economic fallout from the Covid-19 pandemic could render many borrowers unable to pay back loans, increasing the bad loan burden. Only few such as State Bank of India (SBI) have the capacity to raise money from the market.
Fitch Ratings estimates that under a moderate stress scenario, Indian banks are around $15 billion short of the capital required to meet a 10 per cent weighted-average common equity tier 1 ratio.
The gap rises to about $58 billion in FY22 under a high-stress scenario, where economic growth fails to sustainably recover despite a phased opening up of the economy.
State-run banks are likely to account for the bulk of the capital shortfall, as large private banks should stay above the minimum requirements, despite some capital erosion in a high-stress scenario, Fitch says.
Public sector bank executives say a clear picture would emerge only after the six-month moratorium on EMI payments ends in August. Also, the Reserve Bank of India’s decision on one-time restructuring would be critical to banks, helping them manage burden to a certain extent, say bankers.
Many of the banks — SBI, Canara, Punjab National Bank and Bank of Baroda — are working on plans to hit the market to raise capital this year.
While SBI has approved the plan to raise up to Rs 20,000 crore, PNB will take shareholders’ nod for raising up to Rs 7,000 crore.
Prior to consolidation in the public sector banking space, an assessment was made about the amount of capital the banks would need, says Sunil Mehta, chief executive at the Indian Banks’ Association (IBA). Based on that exercise, the government infused capital into banks in FY20.
But that was before Covid-19 struck.
A nationwide lockdown imposed in March-end to stem the spread of the Covid-19 pandemic crippled the economy, and banks see the situation worsening on the bad loan front.
A one-time restructuring of loans, if allowed by the RBI, would limit the capital requirements of banks in the current financial year. The government may need to infuse capital in the next financial year, Mehta says.
The bright side
However, there are some unlikely bright spots, such as the higher provision coverage ratio (PCR) for bad loans. As stressed cases get resolved, banks would be able to deploy that money better.
Also, learning from past mistakes, banks have tightened monitoring to ensure better governance. This should help ask the promoters to chip in funds in times of stress to ensure there’s enough “skin in the game” and limit the burden.
Lenders also stand to benefit from the recent mergers which have led to economies of scale. It is true for Punjab National Bank, which took into its fold Oriental Bank of Commerce and United Bank of India; Union Bank of India, which merged Andhra Bank and Corporation Bank into itself.
Indian Bank which amalgamated Allahabad Bank, and Canara Bank which merged Syndicate Bank into itself will also benefit, said a senior banker with a Mumbai-based PSB.
Injection is critical
The government has cumulatively injected around $43 billion in fresh capital into banks over the past five years (FY15-FY20). However, these failed to meaningfully improve state banks’ core capital, as they were piecemeal and preceded large losses, which were often 2-3 times higher than the capital infused.
In real terms, around 60 per cent of the above injected capital came in the past two years — most of which went towards bridging capital shortfalls.
State banks are also under tremendous pressure to support distressed sectors, both within and outside the government’s announced stimulus measures. This ultimately puts the onus on the government to address capital shortfalls, bankers say.
Fitch says it does not think a capital injection of $15 billion would significantly pressure India’s sovereign rating. But, the pandemic has already raised the state’s public-debt burden and has led to deterioration in its fiscal metrics.
A well-functioning banking sector is needed for achieving sustained economic growth of 6-7 per cent, barring which India’s economic uncertainty will continue, it pointed out.