Govt’s recapitalisation plan for PSBs insufficient to support lending growth: Fitch

28 Feb 2019 Evaluate

Amid the government’s latest move of capital infusion into public sector banks (PSBs) to help them meet regulatory capital requirements, Fitch Ratings in its latest report has stated that the government's $7 billion (around Rs 48,000 crore) fund infusion into PSBs would not be sufficient to support significantly stronger lending growth. It estimated that banks will need an additional $23 billion (around Rs 1.6 trillion) in 2019, after these latest injections, to sufficiently meet minimum capital standards. Stating that the Indian authorities' approach to the banking sector has clearly shifted towards spurring lending in recent months, Fitch said these steps, along with capital injections, have eased but not removed capital constraints on state banks' growth.

The report titled ‘Indian government's bank recap may not unlock faster growth' stated that a large proportion of the government's latest round of recapitalisation is still likely to go towards addressing regulatory shortfalls rather than to support asset growth. The finance ministry recently announced infusion of Rs 48,239 crore in 12 PSBs in this fiscal to help them maintain regulatory capital requirements and finance growth plans.

However, Fitch said more will be needed as a cushion against future losses at some state banks, as borrower defaults and slow bad loan resolution continue to put pressure on non-performing loan (NPL) provisions. It said the capital injections have allowed Allahabad Bank and Corporation Bank to leave the RBI's prompt corrective action (PCA) framework. It said leaving the PCA framework will not remove the constraints on growth imposed by weak capitalisation, unless the state injects more capital into these banks or there is strong turnaround in profitability that support internal capital generation, which looks unlikely.

Fitch further estimated that overall banks will need an additional $23 billion in 2019, after these latest injections, to sufficiently meet minimum Basel III capital standards, achieve 65% NPL cover, and leave surplus capital for growth. Capital needs have fallen from their estimate of $65 billion (over Rs 4 trillion) in September 2017, but progress has not been significant enough to spur loan growth. Besides, Fitch has a negative sector outlook on Indian banks to reflect the near-term pressures from the sector's NPL stock and elevated credit costs on bank earnings and capitalisation.

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