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Govt must pump in more capital into PSU banks for effective NPA resolution: Fitch

LiveMint logoLiveMint 12-09-2017 Alekh Archana

Mumbai: Fitch Ratings on Tuesday said the government will have to pump in additional capital into public sector banks to aid effective bad loan resolution and if it is to raise loan growth.

“Weak capital positions have a major negative influence on Indian banks’ Viability Ratings, which will come under more pressure if the problem is not addressed,” the rating agency said in a note.

According to the rating agency, Indian banks need additional capital of $65 billion to meet Basel-III capital norms, which will be fully implemented from the end of March 2019.

“Even so, state banks—which account for 95% of the estimated shortage—have limited options to raise the capital they still require. Prospects for internal capital generation are weak and low investor confidence impedes access to the equity capital market,” the note said.

The government has budgeted only another $3 billion in fresh equity for 21 state-owned banks over the current and the next fiscal years.

Fitch said that the resolution process has gathered momentum with the central bank directing banks to refer 12 large accounts for insolvency proceedings. The Reserve Bank of India (RBI) asked banks to finalize a resolution plan in another at least 28 cases by 13 December, failing which these accounts will have to be referred for proceedings under the Insolvency and Bankruptcy Code (IBC).

The average provision, money kept aside in the form of cover, on these accounts is 40-50%. This is low given that the accounts remained non-performing for two or more years, Fitch said. “Lower-than-expected recoveries are likely to put earnings at risk, and capital could be further undermined as a result,” the rating agency said.

Indian banks’ stressed loans have ballooned to nearly Rs10 trillion with state-owned banks accounting for a majority share.

In a speech on 7 September, RBI deputy governor Viral Acharya batted for “decisive and adequate recapitalization” of public sector banks to improve the health of these lenders, even as he expressed concern at the “glacial” pace of restoring their health.

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