Banks would have to wait more before seeing revival in asset quality

Key Highlights: 

• Indian banks' capitalisation profiles worsen
• Asset quality outlook remains weak
• Gross NPAs to rise by Rs 8.5 lakh crore about 10.3% by end of FY18

Moody's Investors Service believes that weak capitalisation remains a key reason for weakness of rated public sector banks (PSBs). 

Alka Anbarasu, a Moody's Vice President and Senior Analyst said, “In our central scenario, we estimate that the 11 Moody's-rated public sector banks will require external equity capital of about Rs 70,000 - Rs 95,000 crore." 

Such an amount is higher than the remaining Rs 20,000 crore budgeted by the government towards capital infusion until March 2019.

Furthermore, due to lack in pace of NPA resolution, Moody's feel outlook on the banks' asset quality remain week even though pace of fresh NPA generation has slowed down. 

Karthik Srinivasan, Group Head, Financial sector ratings, ICRA Limited said, "We estimate the fresh NPA generation at 5.5% for FY17 as compared to 6% for FY16 while the overall stressed assets for the banking system stood is estimated around 16-17% as on March 2017."

ICRA believes there could be further 86% of fresh NPA generation in FY17 - from outside the  restructured book. It said, "The pressure on asset quality indicators is exacerbated, because credit offtake will likely to remain tepid, given the banks' capital constraints."

Additionally, the expiry of 18-month period of the standstill clause for asset classification under the strategic debt restructuring (SDR) framework during the current year could pose upside risks. 

Thus, ICRA sees gross NPAs increasing between Rs 8.2 lakh - Rs 8.5 lakh crore - about 9.9% - 10.3% by end of FY18. 

As on March 2017, banks had gross NPAs at 9.5% of gross advances valuing up to Rs  7.65 lakh crore. GNPAs of a total 21 PSBs stood at Rs 6.19 lakh crore, rising by 19.96% compared to Rs 5.16 lakh crore in the similar period of the previous year.

At the same time, ICRA believes recent ordinance for amendment in the Banking Regulation Act of 1949 is a positive for the banks, because it highlights the urgency and the willingness of the government to resolve the stressed asset challenges of the system.

However, limited profitability and capital cushions will prove a challenge in terms of them absorbing the haircuts stipulated by the committees constituted for the resolution of stressed assets.

ICRA said, "Given the limited time-frame under the bankruptcy code to resolve the accounts and impending increase in credit costs, the banks will also be forced to accelerate the capital raising process from the markets, given that the planned infusion by the government is limited in 2017."