MUMBAI, Feb 15: Domestic rating agency Indian Ratings and Research today maintained stable outlook on large public sector banks and private sector banks supported by high levels of capital.
“We expect large public sector banks with better access to capital and private sector banks with their robust capitalisation to navigate another year of low growth and high credit costs with a stable outlook,” India Rating’s research analyst Abhishek Bhattacharya said.
The rating agency today released its report – Indian Banks Outlook for FY18.
India Ratings, however, retained its negative outlook on mid-sized and smaller state-run banks due to limited access to capital and large non-performing assets.
“These banks will find it increasingly difficult to grow given increasing capital requirements and large funding gaps impeding their ability to compete on spreads,” Bhattacharya noted.
He said banks would need Rs 91,000 crore in tier-I capital till March 2019 to grow at a bare minimum pace of 8-9 per cent CAGR. It includes the Rs 20,000 crore of residual tranches from the government’s Indradhanush programme.
“There is an increasing divide between the large and smaller PSBs, with the former having some access to growth capital, better market valuation, and also some non-core assets to divest while the latter would only receive bailout capital if required and would need to ration their capital consumption over next two years,” the rating agency said.
It estimates the requirement of additional tier-I (AT1) bonds to be Rs 50,000 crore till March 2019.
Bhattacharya said impaired assets of banks are expected to peak at 12.5-13 per cent by the financial year 2017-18 and 2018-19, which is likely to be at 12 per cent by the end of financial year 2016-17.
He said sectors such as iron and steel and textiles have seen a fair bit of recognition but provisioning might still not be adequate to protect against eventual loss given defaults (LGDs).
Significant proportion of unrecognised stress pertains to sectors such as infrastructure, realty and capital goods which potentially have long-term viable assets but would increasingly need cash flow restructuring to avoid slippages in absence of alternate refinancing sources, he said.
“With recent regulations further impeding the ability of asset reconstruction companies (ARCs) to buy meaningful assets, and nature of stress being predominantly balance sheet driven, banks would need concerted resolution with a ‘going concern’ approach to avoid deep losses,” he said. (PTI)