The sharp slowdown in India's economic growth, exacerbated by the coronavirus outbreak, will hurt public sector banks' (PSBs) asset quality and drive up credit costs, said Moody’s Investors Service recently.
"We expect to see PSBs' already weak capital buffers to be depleted, with INR1.9 trillion-INR2.1 trillion ($25 billion-$28 billion) in external capital needed over the next two years to restore loss-absorbing buffers," said Alka Anbarasu, a Moody's Vice President and Senior Credit Officer.
The most likely source of capital to plug these capital shortfalls is the government, despite its completion of a large recapitalisation just a few months ago, Moody’s pointed out.
“PSBs dominate India's banking system, meaning any failure could jeopardise financial stability," Anbarasu warned. "As such, we expect government support will remain forthcoming.”
Moody's said its base case assumes a sharp contraction in the Indian economy in the fiscal year ending March 2021 (fiscal 2021), before returning to modest growth in fiscal 2022.
Even before the coronavirus outbreak, the economy had already been growing at its slowest pace in six years, the firm pointed out.
Moody's expects retail and micro, small and medium-sized enterprises (MSMEs) will lead a rise in nonperforming loans (NPLs), delaying the ongoing clean-up of legacy corporate NPLs.
PSBs in turn will need a substantial amount of external capital to absorb increased credit costs and support further credit growth, according to the credit rating agency.
In addition, Moody’s estimates the banks will require approximately INR1.0 trillion to build loan-loss provisions to about 70% of NPLs, and a similar amount to grow loans 8%-10% annually – faster than the 4% recorded in fiscal 2020 and supporting economic expansion.
Uncertainty surrounding India's economic recovery and the ongoing clean-up of balance sheets are making it difficult for banks to raise equity capital from markets, leaving the government as the obvious source, Moody’s noted.