PSBs may require up to ₹43,000 cr in FY22: ICRA

Public Sector Banks (PSBs) may require up to ₹43,000-crore capital during FY22 not only for growth but also to replace Additional Tier I (AT-I) bonds where a call option would fall due, according to credit rating agency ICRA.

The agency expects PSBs to break even in a worst-case scenario as well with the possibility of a return on equity (RoE) of about 5 per cent in a favourable scenario during FY22, which means their capital requirements will be lower because of the losses.

“The capital requirements would, however, arise on account of the estimated ₹23,000-crore Additional Tier I (AT-I) bonds where a call option would fall due next year.

“Hence, public banks will require capital not only for growth but also to replace these bonds to maintain their capital profiles,” ICRA said in a note on ‘Union Budget 2021-22 Expectations’.

Factoring in the aforementioned two requirements, ICRA estimates the capital requirements for public banks to be negligible in a favourable scenario (RoE of 5 per cent), but up to ₹43,000 crore in a worst-case scenario.

ICRA observed that the appetite of investors towards the AT-I bonds of public banks has improved recently with more public banks issuing AT-I bonds in FY21 compared to FY20.

Recapitalisation burden

If the banks can raise a part of the ₹43,000-crore capital through AT-Is and market sources, it could reduce the Government of India’s (GoI) recapitalisation burden for the coming fiscal, it added.

Though clarity is likely to emerge on this front only in H2 (October 2021-March 2022) FY22, ICRA expects GoI to allocate some quantum to the PSBs in the Budget itself (unlike last year when they made the announcement later) to provide some additional comfort to the markets.

As per the Reserve Bank of India’s (RBI) ‘Report on Trend and Progress of Banking in India 2019-20’, preliminary estimates suggest potential recapitalisation requirements for meeting regulatory purposes as well as for growth capital may be to the extent of 150 basis points (bps) of the common equity tier I (CET I) ratio for the banking system.

According to the report, 15 PSBs collectively raised ₹36,439 crore in FY21 (up to November 2020). Three private sector banks collectively raised ₹32,443 crore.

NBFCs

The agency opined that for the Non-Banking Finance Companies/ NBFCs (non-infra), extension of the Reserve Bank of India (RBI) and GoI-backed funding and guarantee schemes, which were rolled-out in the current fiscal, are likely to be the keys for the sector’s near-term liquidity.

“Considering the moderate growth expectation of 7-9 per cent in FY22, it would also be critical to provide guidance on the medium-term support framework for the sector to boost investor confidence and for sustainable growth revival,”the note said.

The expected boost to infrastructure spending would kindle demand for infra-focussed NBFCs, however, most of these are public sector undertakings (PSUs).

The agency is of the view that establishment of institutions, which can extend long-term funding to these infra-NFBCs and also banks for infrastructure development, would ensure adequate sectoral liquidity.

ICRA said benefits and additional incentives for MSMEs and tax-breaks to home-buyers and builders in the housing sector, especially affordable housing, would also augur well for the sector, which is expected to be faced with asset quality headwind.