Rating agency ICRA has downgraded ratings of various borrowing programmes of Bank of India (BoI). It has also cut the outlook of Indian Overseas Bank (IOB) from stable to negative due to higher than anticipated stress.
Karthik Srinivasan, senior VP and co-head of financial sector ratings at ICRA, says not just BoI, but other banks too are facing challenges on the asset quality front. "The stress has only increased and this pressure on asset quality is impacting the profitability of these banks."
He believes banks need closer to Rs 2 lakh crore by way of recapitalisation.
Below is the verbatim transcript of Karthik Srinivasan's interview with Reema Tendulkar and Nigel D'Souza on CNBC-TV18.
Reema: First take us through the rationale for downgrading your assessment on rating on Bank of India (BoI)?
A: The rationale for downgrade has largely been the challenges on the asset quality front not only for this bank but most of the rating action that we have done over the last couple of days are on account of the challenges on the asset quality front and which over the last couple of quarters has only increased and not really come down. In the current scheme of things, it could continue for some more time before the banking sectors gets any respite. So, the pressures on asset quality are adversely impacting the profitability numbers for lot of these banks and in an environment where capital raising is becoming challenging, it is hitting the public sector banks to a greater extent.
Nigel: What is the recapitalisation number you are working with come the Budget and also is there room given the current fiscal deficit targets that we are talking about, what exactly is the number that you are looking out for?
A: Our estimate on capital requirements for the banking system is far higher. We are talking in terms of at least closer or higher than Rs 2 lakh crore for the system as such and the government’s current stated amount is about Rs 70,000 crore over the next three years. So, that is at a lower level. How much the government is going to put as capital, I think we need to wait for the Budget.
Obviously the quantum expected is quite high and that too in the current environment where it is going to be quite challenging for a lot of these banks to get external investors and raise capital. So, to that extent, while the number is there, we would still need to wait for the kind of numbers the government decides to go ahead with.
Reema: Let me come back to the banking issue, Bank of India, Indian Overseas Bank (IOB), Central Bank of India, UCO Bank, all of them according to you the rating is with a negative bias but that is for the data that we have up until now. Do you believe that the asset quality pressures will persist and there is a likelihood that more PSU banks are going to see downgrades?
A: Asset quality issues are going to persist, a lot of these entities do have exposures to the stressed sector and the current provisioning levels or the assets which have already got classified as stressed NPLs are still on the lower side. So, to that extent with passage of time, the provisioning requirement itself increases as per the Reserve Bank of India (RBI) norms.
Even if things don’t change, the incremental slippages come down, the very fact unless the recoveries happen, the credit cost is going to remain fairly elevated for at least next year, year and a half which is going to put a significant pressure on the profitability and the earnings capability of most of these entities.
Nigel: What is a better idea, to recapitalise some of these PSU banks or do you think setting up and establish a bad bank would be a better idea?
A: Both would be quite challenging in the current scenario. The kind of capital which is required is quite humongous. Setting up of a bad bank is an option which one can consider but one has to look at how would the assets get transferred, how would that entity get capitalised. So, in one way or the other you need to capitalise either the new bank or the existing banks. So, I guess a lot of number work and policy decisions are required to choose between these two.
(Interview transcribed by Priyanka Deshpande)