State-run banks stare at capital shortage again, warns Moody’s
Asset quality to deteriorate, driven by non-performing loans of MSMEs
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.