Situation likely to sustain in FY19: Fitch

Losses at state-run banks have almost entirely wiped out the $13-billion capital infusion by the government, and the situation is unlikely to improve in the current fiscal year, ratings agency Fitch said.

The big losses will pressure banks’ viability ratings as well, it warned.

“Cumulative losses at the state banks were large enough to wipe out almost all of the government’s capital injections of $13 billion in FY18, and weak performance is likely to continue in the coming year,” it said.

The poor results are due to revision in non performing asset (NPA) recognition norms, which is accelerating bad loan recognition, it said, adding that the February 12 revision is part of a clean-up that should improve the health of the bank sector over the long term.

The revisions have led to a major uptick in credit costs for state-run lenders to 4.3% in FY18, from 2.5% in the year-earlier period, while NPAs for the banking sector rose faster than expected to 12.1% from 9.3%.

For state-run lenders, the average NPAs shot up to 14.5%, with IDBI Bank, UCO Bank and Indian Overseas Bank having NPAs of above 25%. About 19 of the 21 state-run banks reported losses for the fiscal, including the country’s largest lender SBI, while the otherwise resilient private sector banks were also not immune, with Axis Bank reporting its first quarterly loss.

Capital buffers at six state-run banks, including second-largest lender by assets Punjab National Bank, slid below the minimum prescribed by the regulators, it said, adding that they will have to meet the 8% requirement by end of FY19.

Govt. capital needed

The $11 billion in capital committed by the government for FY19 will help banks avoid breaching regulatory triggers, but more government capital is required to stabilise banks’ balance sheets, meet regulatory requirements and support growth, it underlined.

It is possible that the list of state-run banks placed under the RBI’s prompt corrective action framework that focuses on strengthening quality over growth, will get enlarged this year, Fitch said.

The higher NPAs reflect a “full recognition of legacy problems,” Fitch said,o welcoming the rise in provision coverage ratios by banks to 50%.

NPA resolutions under the insolvency and bankruptcy code can also release capital for banks, but there is the risk of legal delays, the credit ratings agency said.