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Bad loans almost half of PSU bank's capital base: Fitch Bad loans almost half of PSU bank's capital base: Fitch

Jul-06-2015 | 0 Comments

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MUMBAI: Bad loans will add up to almost half of the equity capital of public sector banks if even a fifth of the loans they have recently restructured continue to default according to a report by Fitch Ratings. According to the agency mid-sized public sector banks remain the weakest and lenders might have to seek funds overseas as there is no domestic market for hybrid capital.

"Capital needs are likely to increase substantially each year up until FY19. There are few indications of a meaningful recovery in earnings in the short term, though stressed assets are likely to have peaked and NPL accretion is easing," Fitch Ratings said.

Describing FY15 as a 'difficult year' Fitch said that state-owned banks continued to face asset-quality pressures, falling profitability and weakened capitalisation. ""System-wide loan growth, at 9.7%, was the lowest over the past decade, and concentrated mainly in retail and farm credit. The system NPL ratio rose to 4.6% of total assets from 4.1% in FY14, though the bulk of the deterioration was accounted for by restructured loans, as expected. Consequently, the broader stressed-assets ratio (which includes performing restructured loans) spiked to 11.1%, from 10%," the report said.


Banks need capital on two fronts - the make provisions for higher bank loans and to meet the new capital requirement by international regulators under Basel III. While the government has assured that it will provide tier-I capital for public sector banks, the more complex hybrid capital - which have some of the features of loans - cannot be entirely raised in India.

"Asset-quality pressures continued to be much higher for the state banks, as reflected in distinctly higher NPL ratios. Capital buffers have consequently deteriorated owing to the continued growth in NPLs and low provisioning. Indian banks' reported Tier 1 capital adequacy ratio improved to 9.7% (up from 9.3% in FY14), while the gap between private and state banks' Tier 1 ratios widened to 440bp," Fitch Ratings said.

On the positive side, Fitch Ratings said that bad loans appear to have peaked. "Gross NPL accretion has already shown signs of deceleration, and we forecast GDP growth to gain momentum and rise to 7.8%. This should also be positive for credit growth as interest rates come down - given what has been surprisingly weak demand for credit. Corporate leverage remains high, and the impact of the large stock of stressed assets is likely to continue hampering profitability," the report said.

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