Moody’s warns of capital concerns for India’s banks

 

Mumbai: Global rating agency Moody’s Investors Services on Monday warned that Indian banks will require more capital than what the government has allocated in last week’s interim budget, especially in the context of higher capital requirements under the Basel III norms and increasing bad loans that would require banks to set aside more money to cover such loans. 

 

“Last Monday, India’s government unveiled its interim budget for the fiscal year starting in April, allocating Rs.11,200 crore ($1.8 billion) for capital injections into public sector banks,” Moody’s said.

“The allocation is credit negative for public sector banks because it is much smaller than the Rs.25,000-36,000 crore ($4.1-$5.8 billion) that we estimated the banks needed to meet a minimum tier 1 ratio of 8% in the fiscal year ending March 2015…Without sufficient government capital infusions, public sector banks will be challenged to maintain minimum tier 1 ratios of 8%,” Moody’s said.

 

In addition, a sharp rise in the bad loans of Indian banks will also require them to have higher amount of capital, Moody’s said. Under the current norms, banks need to set aside more money to cover loans if they become bad, which affects their profitability.

 

“Our estimates assume the banks make adequate provisions to meet a minimum 70% coverage ratio under a range of potential asset-quality outcomes,” Moody’s said.

 

The agency expects that bad loans will continue to rise at Indian banks in fiscal year ending 2015 .

“Indian public sector banks’ need for significant external capital is a result of an increase in non-performing loans (NPLs) owing to the country’s slowing economy and infrastructure bottlenecks, and profitability that is insufficient for internal capital generation to fund loan growth,’ Moody’s said.

 

“As of December 2013, rated public sector banks reported an average gross NPL ratio of 4.3% (of total loans), up from 3.4% in March 2013, and we expect them to continue rising in fiscal 2015,“ it added.

Gross non-performing assets (NPAs) of Indian banks rose to Rs.2.4 trillion at the end of December, about 36% up compared with the same period last year. 

 

Among the banks, Kolkata-based United Bank of India is the worst affected with its gross NPAs standing at about 11% of its total loans. The bank is currently under the inspection of the Reserve Bank of India (RBI), which had barred the lender from giving fresh loans, except certain categories due to lower capital adequacy.

On Monday, United Bank announced that it will issue perpetual non-cumulative preference shares (PNCPS) to the government to raise capital.

 

The bank’s board has given approval to “create, offer, issue and allot by conversion of upto 80000 PNCPS of Rs.1 lakh each into such number of equity shares of Rs.10 each at an conversion price…on preferential basis to government of India in one or more tranches,” it said in a release to exchanges.

The United Bank board has further approved issuance and allotment by conversion of PNCPS up to 110 million equity shares of Rs.10 to the president of India by March, the release said.

 

RANJAY KUMAR

PGDM 1ST YEAR

SOURCE -: MINT