Indian State Banks To Require More Capital as Safeguard against Stress: Fitch
The plans of public sector banks (PSBs) in India to raise capital from private sources will not be sufficient to mitigate anticipated risks unless supplemented with additional capital support from the State, says Fitch Ratings. 
 
Several large State-run banks have recently announced plans to raise a total of around $6 billion in fresh equity from the capital market. 
 
According to Fitch, state-run banks are already facing significant execution risks in raising equity due to depressed stock market valuations and weak investor interest. A recent news report citing the government's plan to reduce the number of state banks to five from 12 while selling majority stakes in several others, including Bank of India to raise resources, could add to uncertainties. 
 
It says, "A reduction in the state's majority shareholding in some of its banks may dent depositor confidence and potentially lead to negative rating action as their long-term ratings are anchored to state support. It may also reduce investor appetite at a time when government capital support has stuttered, and an acceleration in new coronavirus cases is hampering a meaningful economic recovery and increasing risks for banks' balance sheets." 
 
"We believe the proposed stake sales will be very challenging in the current economic climate and in light of the potential capital shortfalls we calculate at the state banks in our stress test. It could also require amendments to the banking company acts, which currently prescribe a minimum government shareholding of 51% for the state banks, thus adding to execution risk," Fitch added.
 
The ratings agency says it expects PSBs in India will remain reliant on fresh equity injections from the state as the proposed capital amounts, if raised fully, will likely add only around 100-150 basis points (bps) to State banks' existing common equity tier-1 (CET1) ratios. It says, "Under our high stress scenario, this may provide some interim capital relief, testing the banks' ability to raise fresh equity on their own, but will not be enough to stave off heightened solvency risks. It would also increase the prospect of further regulatory forbearance." 
 
Fitch says it believes recapitalisation requirements will be substantially higher once pandemic-related asset quality deterioration starts manifesting on bank balance sheets when regulatory forbearance ends, in which case raising equity from the market will be more difficult. 
 
"Recent comments by the central bank governor highlighting the need for recapitalisation further underscores this imperative, emphasising the risks that deteriorating asset quality will pose to state banks' limited capital and earnings buffers. This is consistent with the outcome of our stress test on individual banks, whereby the state banks have significantly larger capital shortfalls than their private counterparts," the ratings agency added.
 
Indian private banks' recapitalisation requirements are comparatively more modest than their proposed fresh capital raising, with ICICI Bank Ltd and Axis Bank Ltd likely to add around 200bps-245bps to their existing CET1 ratios. This, according to Fitch, will further widen the capital gap between private and state banks, which, on average, is about 350bps. 
 
Fitch says it believes ICICI Bank and Axis Bank—which have proposed plans to raise $2 billion each—will likely be encouraged by recent investor appetite for the almost $1 billion and $1.9 billion raised by Kotak Mahindra Bank and Yes Bank, respectively. Yes Bank was also recently supported through an injection of capital by the largest State-owned bank, State Bank of India (SBI), it added.
 
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    Banks' Gross NPA ratio may surge to 14.7% in FY21: RBI repor
    The Covid-19 pandemic is likely to worsen India's bad loan scenario, as the latest Financial Stability Report of the Reserve Bank of India (RBI) predicts that gross non-performing assets (NPA) ratio of Indian banks may increase to 14.7 per cent by the end of the current fiscal, in case the stress scenario severely worsens.
     
    Under the baseline scenario, the gross NPA may increase to 12.5 per cent by March 2021. At the end of the FY20, the gross NPA ration was at 8.5 per cent.
     
    "Macro stress tests for credit risk indicate that the GNPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario; the ratio may escalate to 14.7 per cent under a very severely stressed scenario," it said.
     
    The forecast comes at a time when several experts and economists have raised concerns that the loan moratoriums and collateral free loans announced in the recent economic package would lead to more stressed assets and weaken the asset quality of the banks.
     
    The report showed that the capital to risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) edged down to 14.8 per cent in March 2020 from 15.0 per cent in September 2019 while their gross non-performing asset (GNPA) ratio declined to 8.5 per cent from 9.3 per cent and the provision coverage ratio (PCR) improved to 65.4 per cent from 61.6 per cent over this period.
     
    It noted that bank credit, which had considerably weakened during the first half of 2019-20, slid down further in the subsequent period with the moderation becoming broad-based across bank groups.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Route One Investment gets RBI nod to raise its stake to 10% in IndusInd Bank
    IndusInd Bank on Friday said that the US-based hedge fund Route One Investment Company has received Reserve Bank of India's (RBI) approval to raise its stake to 10 per cent from its current stake of 4.96 per cent.
     
    In a regulatory filing, the bank said that its board of directors in its meeting on July 5 granted its approval to the proposed acquisition of shares.
     
    "Route One Investment Company LP, USA (ROIC) is an existing investor holding approximately 4.96 per cent of the issued and subscribed capital of the bank and the investor approached the Reserve Bank of India seeking a prior approval to increase their stake in the bank up to 10 per cent," it said.
     
    "RBI has forwarded the bank a copy of the letter addressed to ROIC, granting approval for increasing their shareholding up to 10 per cent of the paid-up voting equity capital of IndusInd Bank Limited," it said.
     
    Shares of IndusInd Bank rose on Friday on the back of the announcement. At 2.04 p.m., they were trading on the BSE at Rs 524.90, higher by Rs 10.95 or 2.13 per cent from its previous close.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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