Gold Silver Reports → The standalone credit profiles of many Indian public sector banks should come under pressure unless there is meaningful action to restore capital adequacy, says Fitch Ratings. Significant quarterly losses reported at several large public banks last week, including Bank of Baroda and Bank of India, underscored long-standing balance-sheet and capital risks stemming from legacy issues pertaining to poor asset quality and weak provisioning.
Fitch’s estimated capital need for the system of USD140bn may need to be reassessed, given some of the losses. But the revision should only be slight, considering that Fitch has long assessed India’s banking system on a stressed-asset basis – rather than NPLs – and factored in under-provisioning in the ratings for public sector banks.
The sudden deterioration in profitability at many public banks in the third quarter (3QFY16) of the financial year ending March 2016 (FY16) was triggered mainly by higher provisioning resulting from the reclassification of certain loans. Pressure from the Reserve Bank of India (RBI) was a key factor driving the bulk of reclassification. The RBI had nudged banks (both public and private) to identify stressed accounts and significantly raise provisioning over two quarters through to FYE16.
It is unusual for the RBI to be driving state banks to raise provisioning so quickly, and indicates that earnings pressures will continue in 4QFY16 and possibly beyond. Fitch believes the RBI’s intention to clean-up bank balance sheets by FY17 as a pre-requisite to kick-start credit growth could help to revive investor confidence in public-sector banks.
But the suddenness and speed of the provisioning in 2HFY16 highlights how long it has taken to address poor balance sheets. It also raises questions over the pace and implementation of bank recapitalisation and reforms, especially when central bank intervention is required in identification of bad assets. → Neal Bhai Reports