The Hindu

State-run banks stare at capital shortage again, warns Moody’s

Asset quality to deteriorat­e, driven by non-performing loans of MSMEs

- Special Correspond­ent

A sharp slowdown in India’s economic growth exacerbate­d by the COVID-19 outbreak will hurt public sector banks’ (PSBs) asset quality, and result in sharp increases in credit costs, hurting profitabil­ity, according to Moody’s Investors Service.

This will lead to a depletion of the already weak capital buffers of the PSBs, it wrote in a report.

“We estimate the PSBs will need ₹1.9-₹2.1 trillion ($25-$28 billion) in external capital over the next two years to restore their lossabsorb­ing buffers. The most likely source of capital to plug the capital shortfalls will be government support, despite the completion of a large recapitali­sation by the government several months ago,” it said. The banks’ asset quality will deteriorat­e, led by retail and small business loans. “We expect the Indian economy will contract sharply in fiscal year ending March 2021 before returning to growth, though modestly, in the next fiscal,” it said.

As a result, formation of new non-performing loans (NPLs) will accelerate substantia­lly, driven by retail and micro, small and medium enterprise­s (MSME) segments.

Although the one-time loan restructur­ing allowed by the RBI will prevent a sudden rise in NPLs, NPLs and credit costs will increase in the next two years, hurting PSBs’ already weak profitabil­ity and depleting their capitalisa­tion, it said.

If PSBs, which dominate the banking system, fail to function properly in the absence of state capital support, India will face a deepening credit crunch, hampering economic recovery, Moody’s added.

 ?? V. SREENIVASA MURTHY ■ ?? Red flag: NPLs and credit costs will rise in the next two years, depleting PSBs’ capital buffers.
V. SREENIVASA MURTHY ■ Red flag: NPLs and credit costs will rise in the next two years, depleting PSBs’ capital buffers.

Newspapers in English

Newspapers from India