Money & Banking

Indian banks’ bid to boost capital for rocky times ‘credit positive’, says S&P Global Ratings

Mumbai | Updated on July 15, 2020 Published on July 15, 2020

S&P Global Ratings, on Wednesday, said Indian banks’ bid to boost capital for rocky times is credit positive.

Indian banks that have expressed an intention to raise equity include ICICI Bank, Axis Bank, and YES Bank (₹15,000 crore), State Bank of India (₹20,000 crore), Bank of Baroda (₹9,000 crore), and Punjab National Bank (₹7,000 crore).

Others that have recently issued large amounts of capital include Kotak Mahindra Bank (₹7,400 crore) and IDFC First Bank (₹2,000 crore).

S&P believes large capital increases across India’s financial institutions support the system’s stability during these rocky times.

The agency, in a report, said investors and other stakeholders see these measures as necessary for bolstering the resilience of institutions and instilling confidence that these companies can withstand the economic slump.

“We believe top-tier Indian private sector banks are adequately capitalised. They are raising further capital to strengthen their balance sheets, unlike state-owned banks, which generally have only small buffers over regulatory capital,” said credit analyst Michael Puli in the report.

Govt-owned banks need capital

The agency expects government-owned banks in aggregate to be able to absorb the estimated credit losses without breaching the regulatory minimum, but these banks need capital to grow.

In S&P’s base case, where it has factored in 4 to 5 per cent credit growth for government-owned banks in the current fiscal year, it estimated these banks need additional capital of ₹35,000 to ₹40,000 crore this year.

The agency believes the banks are likely to hold a buffer above the minimum capital requirement, which could increase the capital they need to raise.

“Besides State Bank of India and a few other large public-sector banks, we believe many public-sector banks will remain dependent on the government or government-owned enterprises to raise capital, given the low market valuations and a potential crowding out effect stemming from the size of capital raisings already in the market,” said Puli.

Bad loans to jump

S&P has projected non-performing loans to shoot up to 13 to 14 per cent of total loans in the fiscal year ending March 31, 2021, from an estimated 8.5 per cent in the previous fiscal year.

“We anticipate credit costs will rise to about 3.7 per cent of average loans in fiscal 2021. This cost should drop to 2 per cent in fiscal 2022, but this would still be above the 15-year average of 1.5 per cent,” the agency said in a June 30 report.

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Published on July 15, 2020
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