Part of the issue for banks and the government is a strict provisioning regime: the RBI wants banks to provide for at least 50 percent of the secured loans to companies taken to bankruptcy proceedings, and 100 percent for the unsecured part.
A dozen of the biggest such cases account for nearly 1.78 trillion rupees, or a quarter of total non-performing assets.
For those companies, banks will need to provide 180 billion rupees on top of existing provisions, according to July estimates from India Ratings and Research, the local affiliate of Fitch Ratings.
More than 20 other sizeable companies are at risk of being taken to bankruptcy court.
Bankers say these and other pressures – including rising government bond yields that forced banks to post mark-to-market losses – have added to the squeeze, and hit new loans.
According to RBI data, new loans grew at just about 5 percent in the year to March, the lowest growth rate in more than six decades. Several banks have already cut back their loan books to conserve capital.
“What are they (RBI) thinking while they’re taking these steps all at the same time?” said a treasurer at a state-run bank, who didn’t want to be named due to the sensitivity of the issue. “Do they want banks to wind up their businesses, or do they want to save the banks?”
Treasury income accounted for 22.7 percent of banks’ operating profits in the last financial year, doubling its share from a year earlier, India Ratings estimates.
“The almost zero treasury income will hit provisioning ability and, in turn, make it more difficult for weaker banks to give loans as capital becomes more scarce,” said Soumyajit Niyogi, an associate director at the rating agency.
A senior policymaker, who requested anonymity as the discussions are not public, said the government would have to help to sufficiently capitalize the banks.
Fitch Ratings estimates Indian banks will need $65 billion of additional capital by March 2019 to meet Basel III global banking rules. Moody’s expects the top 11 state lenders alone will need nearly $15 billion. The government has just $3 billion left in its budget for bank recapitalization.
“We think capitalization is the biggest challenge for the banks at the
moment, given that earnings will remain subdued and will not support any capital
generation,” said Moody’s Anbarasu.
