Public sector banks will need external capital of up to Rs 2.1 lakh crore over the next two years and the most likely source to plug this shortfall will be government support, Moody’s Investors Service said on Friday.
According to Moody’s, the sharp slowdown in India’s economic growth, exacerbated by the virus outbreak, will hurt the asset quality of public sector banks (PSBs) and drive up credit costs.
“We expect to see PSBs’ already weak capital buffers to be depleted, with Rs 1.9 trillion – Rs 2.1 trillion ($25 billion – $28 billion) in external capital needed over the next two years to restore loss-absorbing buffers,” Moody’s Vice President and Senior Credit Officer Alka Anbarasu said.
PSBs dominate India’s banking system, meaning any failure could jeopardize financial stability, Anbarasu added.
“As such, we expect government support will remain forthcoming,” she said.
In a report titled ‘Coronavirus fallout will leave banks with capital shortages again’, Moody’s said asset quality will deteriorate, led by retail and small business loans.
According to Moody’s, Indian economy will contract sharply in fiscal year ending March 2021 (fiscal 2020) before returning to growth, though modestly, in fiscal 2021.
“As a result, formation of new non-performing loans (NPLs) will accelerate substantially, driven by the retail and micro, small and medium enterprises (MSME) segments.
