Beleaguered Indian banks may need as much as Rs. 2.9 lakh crores in capital in the next three years, says a research.
Banks, mostly state-run, may need at least Rs. 63,000 crores by the end of next fiscal year in the so called additional tier-1 bonds, or internationally known as contingent convertible bonds, which become equity when banks’ capital ratios deteriorate during times of crisis, India Ratings said.
“The market at present might not show the appetite for investment into public sector banks, however if the government is ready to reduce stake in PSBs to 49%, I personally feel the market would be ready to jump in,” said Ananda Bhoumik, managing director, India Ratings and Research.
“`Here IDBI Bank can be a litmus test for the government. If the government is successful, then we might see such instances repeating in other cases as well, especially mid-sized PSBs.”
The Financial Stability report estimates xx percent of loans to be stressed (bad loans plus restructured loans). With the main issue being around the source of such huge funding requirement, India ratings also red flagged the importance of the development of a market for the CoCo bonds as banks have so far only managed to raise a paltry Rs 13,000 crore this year through those securities.
Abhishek Bhattacharya said that mid-sized PSBs which are trading at half their book values, would require Rs 1.2 lakh crore capital by March 2019 which may be difficult unless equity investors turn positive on the sector. In its absence, either the government or a quasi-government institution such as Life Insurance Corp. may have to step in.
“The development of the equity market is extremely critical for the banks to meet their capital requirements,” said Abhishek Bhattacharya, India ratings and Research.
The ratings agency has identified one third of the corporate sector borrowings to be stressed and they expect it to remain so for the next few years. “The estimated stressed corporates is expected to be 21% of the total bank credit, of which around half has been recognised as restructured,” the report said.