In a development highlighting a key challenge facing the country’s banking system, Moody’s Investor Service on Thursday said India’s large state-owned banks will need between Rs 70,000 crore and Rs 95,000 crore of equity capital as the stock of bad loans at these banks is expected to rise in the next two years, squeezing profits further.
“We estimate that the 11 Moody’s-rated public sector banks will require external equity capital of about Rs70,000 crore to Rs95,000 crore,” said Alka Anbarasu, vice-president and senior analyst at Moody’s.
According to a report issued by Moody’s, capital infusion from the government will be the only viable source of external equity capital for state-owned banks, given their low equity valuations.
Under the Indradhanush plan, the government had promised to infuse Rs10,000 crore each in banks this financial year and next. Except State Bank of India, all state-owned banks have a price to book value below one, making it tough for them to raise capital from the market.
The situation is perhaps the gravest for smaller government-run banks given their asset quality and the bad loan burden.
According to Moody’s, gross non-performing assets (NPAs) for the industry, which stood at 9.5 per cent at the end of the March quarter, are expected to increase to Rs 8.2-8.5 trillion or 9.9-10.3 per cent by March 2018.
Moody’s India affiliate Icra Ltd said the recent ordinance to tackle NPAs is positive for the banks, but added their limited profitability and capital availability will make it tough for them to absorb haircuts stipulated by the committee.