State-run banks may need Rs 1.9-2.1 lakh crore of capital infusion: Moodys

Global rating agency in its latest report stated that in order to restore loss-absorbing buffers due to the COVID-19 hit, India’s state-run banks may need Rs 1.90 to 2.10 lakh crore of external capital over the next two years.

Moody’s is of the view that the total amount that public-sector banks (PSBs) may need can be Rs 1 lakh crore to build loan-loss provisions to about 70 per cent of non-performing loans (NPLs), which will leave them with enough capacity to grow loans 8-10 per cent annually, faster than the 4 per cent in the fiscal year 2020.

It further said that the uncertainties surrounding India’s economic recovery as well as the ongoing cleanup of balance sheets are making it difficult for most of the PSBs to raise equity capital from markets. Consequently, these banks will need support from the government to bridge their capital shortfalls, and the agency expects the government to infuse fresh funds into them as it has done in the past.

Besides, Moody’s estimates that under a baseline scenario, the newly-formed bad loans will nearly double to about 3.7 per cent of the gross loans annually in the next two years, largely driven by retail, SME and agriculture segment. In this case, the PSBs' gross non-performing loans ratio is seen rising to 14.5 per cent by March 2022 from 11 per cent in March 2020. In the event of a deeper, more prolonged economic slowdown, Moody’s estimates that NPL formation may increase to about 5.7 per cent of the gross loans annually over the next two years, exceeding a peak of 5.4 per cent reached in the fiscal year 2018, when new corporate NPLs surged.