Moody‘s expects some weak exposure to remain unrecognized even post the asset quality restructuring undertaken by the Reserve Bank of India and some large corporate exposures with weak financial metrics to continue to remain as standard assets on the banks' books.
Moody’s Investors Services expects 40 percent of standard restructured loans or 2.5 percent of gross loans of Indian banking system to ultimately become non-performing loans (NPL).
Assuming banks complete recognition by end FY17 (including classifying all existing weak large corporate accounts as well as restructured accounts as NPLs) and have a loan loss coverage of 70 percent on this enlarged book, Moody's estimates banks to report losses of around Rs 749 billion over this period.
For the 11 public sector banks rated, it estimates that around 4 percent of standard loans are to the troubled corporate groups and not recognized as restructured loans as of September 2015.
Among these, around 2.5 percent are to very weak corporate and are imminent NPLs as these companies face near-term cash flow issues to service debt, a report by the ratings agency said.
It expects some weak exposure to remain unrecognized even post the asset quality restructuring undertaken by the Reserve Bank of India.
The ratings agency had estimated external capital required by rated public sector banks at Rs 1.45 trillion over FY16-FY19,
In an interview to CNBC-TV18, Srikanth Vadlamani, Vice President, Moody’s Investors Service said the Budget target of Rs 25000 crore capital infusion provided by the government earlier looks incompatible to the stress reported by banks in last quarterly earnings.
Also, the capital requirement was worked out based on spaced-out recognition. However, now that the clean-up is front loaded, it would require increased infusion, he said.
"There will be negative pressure on credit profiles of banks if government does not increase capital infusion in the upcoming Budget, " he said, adding " accelerated NPL recognition requires front ending of external capital injections."
Vadlamani feels that public sector banks are unlikely to even gain access to capital markets to raise required funds, given their current low valuations.
Despite all the pressure currently faced by the banking system, Moody’s believes the true underlying asset quality of Indian banks remains largely unchanged.
It expects a meaningful proportion of banks’ exposure to very weak corporate, largely in the steel and power sectors, to be recognised by end of Q4FY16. However, some large corporate exposures with weak financial metrics may continue to remain as standard assets on the banks' books, the note said.
Below is the transcript of Srikanth Vadlamani’s interview with CNBC-TV18's Reema Tendulkar and Ekta Batra.
Reema: We have seen a big increase in the non-performing loans (NPL) of Public Sector Undertaking (PSU) banks. In your note you have indicated that since FY12 the impaired loan ratio for the 11 rated public sector banks has increased to 12.8 percent as of December 2015 from eight percent in FY12. So, from this current 12.8 percent what is your estimate, how much do you think the impaired loan ratio could rise?
A: We had given those estimates in the report. When we look at where the element of under-recognition is we continue to hold the belief that the bulk of it lies in some large exposures. So, we think prior to this quarter those exposures as a percent of the 11 rated banks\\' loan books is around four percent. Some of it would have been recognised by Q3, some of it will get recognised in Q4. So, after Q4 we still think there will be some element of under recognition and our estimate of that is maybe it is around 2-2.5 percent. But again we need to be a bit careful on this. When we say 2-2.5 percent we are sort of adding in a lot of these accounts ultimately become NPLs and while there is a lot of stress in the power sector at a project level it would be unfair to say that all the existing power investments would ultimately become NPLs. That is an extremely pessimistic outlook.
Ekta: The 11 banks that you cover according to you need around Rs 1.4 lakh crore in terms of capital requirements uptil FY19. Your sense in terms of what the Budget might announce in terms of recapitalisation figures?
A: Obviously we don\\'t know what the government is going to do. What we are saying in the report is that the current roadmap of the government is that they are going to infuse Rs 250 billion or Rs 25,000 crore this year. That was the original roadmap. What we have said is that those capital estimates are incompatible with what we have seen in terms of asset quality in Q3 and Q4.
So, that Rs 25,000 crore was set up in a scenario where probably the government was expecting that NPLs recognition will be sort of evenly spaced out. Now, clearly that is being front loaded. So, the capital requirements are also front loaded. So, vis-à-vis what the government has announced we think a lot more needs to come in. Otherwise there is going to be some negative pressure on the real credit profile.
Ekta: How difficult is it going to be for say, PSU banks to offload stake in non-core assets or maybe raise funds from the capital markets. IDBI Bank for example has received SEBI approval for its Qualified institutional placement (QIP) of over Rs 3,700 crore today itself.
A: There are two issues here. One is offloading of non-core assets. That that is something we think that the banks will do but from a materiality perspective we don\\'t think that can make too much of a dent as far as overall capital issue is concerned.
The second avenue is in terms of accessing capital market there the issue has been not the willingness of the banks to come to the capital markets but their ability to access capital markets. We don\\'t think that ability has improved. If anything the Q3 numbers have made it a bit more difficult for them to access the capital markets.
So, we would think that at least in the near term the only source of external capital for these banks would either be the government or quasi-government institutions.
Ekta: Do you think that maybe another quarter of Asset Quality Review (AQR) and hence post that most of the pain would be recognised. We start FY17 on a clean state in terms of gross NPL or further additions to gross NPL?
A: We think after Q4 outside of the large corporate accounts a lot of it has been done. So, if you take out a handful of accounts the slippage rates will come down quite meaningfully. Obviously some of the restructured accounts will slip into NPLs but restructured accounts are already being categorised as impaired loans. So, outside of restructured category we think the slippage rate has come down.
Now the question is what is going to happen with some of the large accounts. So, while the RBI push has cleaned up some big accounts there are some more left. Now, how that will pan out it depends upon the evaluation of economic circumstances. A lot of it is in power sector. So, we don\\'t rule out some of the big accounts starting to come as problem loans over next year but outside of the big accounts most of the cleanup is done.