Banks see improvement in solvency profile in FY21

Banks’ solvency position is relatively better, thereby providing some comfort to their loss-absorption abilities, according to ICRA.

Capital raise, coupled with lower Net Non-Performing Assets (NNPAs), resulted in an improvement in solvency profile for banks during FY21, the agency said in a note.

ICRA noted that public sector banks raised ₹12,000 crore (0.2 per cent of risk weighted assets – RWAs) and private sector banks raised ₹53,600 crore (1.3 per cent of RWAs) of equity capital from market sources during FY21.

In addition, the government also infused ₹20,000 crore (0.3 per cent of RWA) into the public sector banks as part of its budgeted recapitalisation for FY21.

“With decline in Net Non-Performing Assets and improved capital position driven by fresh capital raise during FY21 as well as internal accruals that were buffered by sharp decline in bond yields, the solvency position for the banks stands relatively better providing some comfort to their loss absorption abilities,” as per the note.

With the said capital raise, the Tier I capital position of public sector banks improved to 10.99 per cent as on December 31, 2020, from 9.7 per cent as on March 31, 2020, while for private sector banks, it improved to 16.66 per cent from 14.1 per cent, the note said.

ICRA observed that the Additional Tier-I (AT-I) bond market for public sector banks (PSBs) revived in FY21 with more PSBs issuing AT-I bonds as compared to last year.

However, the recent change in valuation norms of these bonds could reduce the appetite of mutual funds for incremental investments in these bonds, it added.

Anil Gupta, Sector Head – Financial Sector Ratings, ICRA Ratings, said: “As against our estimates of Tier-I ₹32,800-43,100 crore of capital requirements, which factor in ₹23,300 crore of AT-I bonds, where call option is falling due in FY22, the government has budgeted equity capital of ₹20,000 crore for public sector banks for FY22.

“In case the AT-I markets remain dislocated in near term, the government may need to upsize the recapitalisation plan in public banks.”