Indian banks need $20 billion additional capital as credit quality weakens: Credit Suisse

The lenders would require extra capital in the coming 12 months as credit quality declines, resulting in wider provisioning

Rising need for $20 billion (nearly Rs 1.5 lakh crore) worth of additional capital may be felt by the Indian banks amid increasing risks to asset quality from borrowers, a report said. The lenders would require extra capital in the coming 12 months as credit quality declines, resulting in wider provisioning, global brokerage Credit Suisse also said in the report.  

Rs 2.5 lakh crore of debt has already seen rating downgrade, making refinancing further challenging, according to Credit Suisse. The asset quality is likely to further deteriorate owing to the coronavirus crisis inflicted economic downturn. "These 'fallen angels' have ~Rs220 bn (nearly 22,000 crore) of bond repayments due over the next 12 months. Despite growing liquidity, banks are turning even more risk averse and over the past 12 months. 90%+ of their incremental lending has been only to >A-rated corporates," it said.

Rising credit costs

Of the $20 billion worth of expected capital, public sector banks will need the government to recapitalise $13 billion (nearly Rs 97,500 crore), it added. The brokerage estimates that the private sector banks will raise the remaining amount. The global brokerage raised its estimate for credit costs or provisioning requirements by 20-60 per cent, citing an extension in coronavirus lockdown. A few private sector banks are already raising capital from the market. Kotak Mahindra Bank recently launched a qualified institutional placement (QIP) issue. IDFC First Bank and RBL Bank have also raised fresh funds.

HDFC Bank, ICICI Bank top bets

"SBI's stake sale in insurance subs to 30% can cover 50% of its capital call and for ICICI, this is 2x of capital needed. We expect PSUs to need ~US$13 bn recap from the government. We cut our FY21/22E and TPs by 10-20% as we build in higher credit costs. HDFC Bank, ICICI and Axis are our preferred sector picks," it noted.

Challenges for NBFCs

In addition, the non-bank lenders or NBFCs face additional challenges as 30-70 per cent of loans are under moratorium and access to funding is "differentiated", Credit Suisse stated. "We estimate that 70% of the Indian financial system's lending capacity is now constrained. PSU Banks (ex-SBI), with 25% of system credit are still to emerge from their NPA issues and are now in the midst of mergers. NBFCs (22% of credit) and small private banks (8%) are also pulling back, given their rising liquidity constraints. ECBs (5%) and bond markets (10%) are also shut, particularly for borrowers with falling ratings," the report noted.

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