Brace for the worst. Indian banks will need more capital than what was thought earlier to comply with Basel-III capital norms and fuel growth. India Ratings is of the view that an additional Rs 1 lakh crore will be needed to get banks into shape given their exposure to high leverage borrowers; the share of state-run banks will be Rs 93,000 crore.
In effect, the capital needed will be excess of the Rs 2.40 lakh crore estimated by the rating agency to comply with Basel-III requirements which kick in from fiscal 2019
India Inc Will Hit Banks
The study reveals that banks would need an average 24 per cent reduction in their current exposure to ensure reasonable debt servicing by these corporates on a sustained basis. For state-run banks, which have about 90 per cent share of this exposure, this amount comes to around Rs 93,000 crore or about 1.7 per cent of their fiscal-2015s (estimates) of risk weighted assets.
Assuming banks provide for this haircut either as a provision ramp-up or by building additional capital buffers, this exposure can add significantly to our estimate of Rs 2,40,000 crore of common equity tier-1 (CET1) needed for the Basel-III transition, said India Ratings.
The overall debt reduction or haircut required would be around 24 per cent of the bank debt analysed by the rating agency. While companies in the power, other infra and iron and steel sectors would need a haircut of 20-30 per cent, a few deeply leveraged names in the textile and sugar sectors might require a higher amount of debt reduction (30-40 per cent. If we include the seven (Rajasthan, Uttar Pradesh, Haryana, Punjab, Andhra Pradesh, Madhya Pradesh and Tamil Nadu) distressed state electricity boards (including only their distribution entities) to the analysis using our estimate of their fiscal 2015s debt and their respective EBITs (earnings before interest and taxation) at their operating best over the last 10 years, even then they would need a minimum 30 per cent haircut.Mint Road Was Spot On It might be recalled that the Reserve Bank of Indias Financial Stability Report (June2015) had observed that gross non-performing advances (GNPAs) of banks as a percentage of gross advances increased to 4.6 per cent from 4.5 per cent between September 2014 and March 2015. The restructured standard advances during the period also increased, pushing up stressed advances to 11.1 per cent (10.7 per cent).
State-run banks recorded the highest level of stressed assets at 13.5 per cent of total advances at end-March 2015, compared to 4.6 per cent in the case of private banks. The net non-performing advances (NNPAs) as a percentage of the total net advances for all banks remained unchanged at 2.5 per cent at end-September 2014 and end-March 2015. But at the bank group level, NNPA ratio of state-run banks increased to 3.2 per cent (3.1 per cent); and in the case of private banks to 0.9 per cent (0.8 per cent). The FSR made particular mention of the mess in the power sector. It noted that the deteriorating financial health of distribution companies (Discoms) is an area of concern. As state governments have not been able to strengthen their financial health under their financial restructuring plans (FRP). Thats because discoms have been unable to comply with the requirements relating to the elimination of the gap between average cost of supply (ACS) and average revenue realised (ARR), reduction of transmission & distribution (T&D) losses, fixing tariff on a regular basis and setting up of the State Electricity Distribution Responsibility Act.
Banks have restructured around Rs 53,000 crore of the seven discoms (Rajasthan, Uttar Pradesh, Haryana, Punjab, Andhra Pradesh, Madhya Pradesh and Tamil Nadu) exposure under FRP. The moratorium period for repayment of the principal amounting to Rs 43,000 crore ended-March 2015. Considering the inadequate fiscal space, it is quite likely that the state governments might not be in a position to repay the overdue principal and installments in time the probability of slippage of this exposure into NPAs is very high considering the implementation of new regulatory norms on restructuring of loans and advances effective April 1, 2015.
The last line is a reference to the fact that Mint Road has made it clear that even restructured advances will be deemed as NPAs from the current fiscal.