Economic shock to hurt India's public sector banks

The government will be the likely source for recapitalisation.

The steep economic plunge made worse by the pandemic will hurt Indian public sector banks’ (PSBs) asset quality and hike up costs, warns Moody’s Investors Service.

These banks’ already feeble capital will be further weakened, with $25b to $28b in external capital needed over the next two years to recover loss-absorbing buffers, analyst Alka Anbarasu said.

The government will be the likely source of capital replenishment despite its recapitalisation a few months ago, as any failure in the PSBs could put financial stability at risk, Anbarasu added.

Uncertainty surrounding economic recovery and the ongoing clean-up of balance sheets are making it difficult for banks to raise equity capital from markets, leaving the government as the obvious source.

There will be a sharp economic contraction come FY2021 before a modest recovery the same year, Moody’s said. Retail and micro, small and medium-sized enterprises (MSMEs) will lead a rise in non-performing loans (NPLs) which will delay the ongoing clean-up of legacy corporate NPLs.

PSBs in turn will need a substantial amount of external capital to absorb increased credit costs and support further credit growth, an approximate $13.3b (INR1t) to build loan-loss provisions to about 70% of NPLs, and a similar amount to grow loans 8%-10% annually.