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Indian banks will need Rs1.9 trillion capital by March 2019: S&P

LiveMint logoLiveMint 01-08-2017 Malvika Joshi

Indian banks may need an additional Rs1.9 trillion by March 2019 in order to write down losses on non-performing loans and meet regulatory requirements under Basel III, said a report from S&P Global Ratings.

The global credit rating firm said public sector banks will find it challenging to raise funds from the equity market owing to lower valuations, overcrowding in the market and regulations.

“The lack of capital restricts the ability of India’s public sector banks to write down non-performing loans to more accurate levels. Weak profitability and rising capital demands from Basel III implementation will also continue to pressure the capitalization of many of these banks,” an S&P statement said.

Stressed assets in the Indian banking system stand at Rs10 trillion. Out of this, the Reserve Bank has identified the top 500 bad loan cases and is directly intervening to resolve them.

The report further said public sector banks may find it hard even to raise money by issuing additional Tier-I capital instruments because the risk of default on these instruments is rising. Tier-I capital consists mainly of share capital and disclosed reserves and is a bank’s highest quality capital because it is fully available to cover losses.

Nevertheless, the report stated that credit profiles of public sector banks continue to benefit due to “ongoing capital support and very high likelihood of government support in the event of distress.”

The credit rating firm also called capital infusion by the government in public sector banks under the Indradhanush plan as “modest”. The government had budgeted Rs70,000 crore for capital infusion in public sector banks under the plan over a period of four years. In the current fiscal Rs10,000 crore have been allocated by the government for public sector banks.

The report also said the time was ripe for consolidation in the banking sector as public sector banks with lower capitalization and internal generation of capital could become takeover targets for better performing lenders.

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