With the rise in non-performing assets exerting pressure on finances, Indian banks’ profitability hit a low in the post 2008 financial crisis period, and stood at 13 per cent as on March 2014 as compared to 13.88 per cent in March 2013, according to data compiled by the Reserve Bank of India (RBI). Banks’ CAR was 13.01 per cent as on March 2008.
Public sector banks are worst hit with their average capital adequacy ratio falling to 10.67 per cent as on quarter ended June as compared to 11.18 per cent in March 2014.
The situation is worrisome as bad loans continue to mount amid a slowing economy where interest rates have stayed elevated. Gross non-performing assets of public sector banks increased to 4.1 per cent as on end March from 3.6 per cent during the same period of previous year. Net NPA to net advances were at 2.2 per cent as compared to 1.7 per during the same period.
“The obvious choice would be to get rid of the NPAs that necessitate steep provisioning and prevent new credit growth. However, that has not been easy. If excess SLR is converted into loans as business picks up, the risk weights will shift further from G Sec to corporate, making CARs look worse,” said Shinjini Kumar leader, banking and capital markets, PwC India.
Banks are sitting on pile of restructured assets with the recast asset ratio to gross advances is 5.9 per cent as on end March as compared to 5.8 per cent year ago. Public sector banks constitute 92 per cent of the sector’s total restructured advances.
In addition, public sector banks will need additional capital to comply with the Basel-III norms.
According to the government’s estimates, public sector banks will need Rs 2.4 lakh crore equity capital by 2018 to meet the Basel-III norms. These new norms have been implemented in India from April 1, 2013 in phases and will be fully implemented as on March 31, 2019.
Public sector banks’ woos have compounded as the present government yet to allocate fresh funds for infusion during the current financial year. Government banks were expecting the finance minister to announce additional capital during the budget. P Chidambaram, the finance minister of the previous UPA government has allocated Rs 11,200 crore for capital infusion during the interim budget.
These banks are now planning to raise funds from the market via qualified institutional placement/follow-on public offer route to raise funds.
“Banks will want to access fresh capital for Basel implementation, support provisions and growth and deal with the new restructuring regime of no forbearance. Some may be able to access capital at reasonable costs, while others may not, making their situation worse,” Kumar said.