Lending pressure, rising NPAs may impact banks’ ratings

I E ;Surabhi : Wed Nov 13 2013, 01:50 hrs

The dual problems of lending more to boost demand and deteriorating asset quality of public sector banks seem to be putting severe pressure on their capital adequacy ratio, which, in turn, could impact their credit ratings.

Already, in recent months, international rating agencies Fitch and Moody's have downgraded debt ratings of state-owned lenders including State Bank of India, Bank of Baroda and Punjab National Bank on concerns of credit quality and capital infusion. The finance ministry, however, has tried to explain away the rising gross non-performing assets (NPAs) of banks as a function of the economy. Similarly, it has allocated Rs 14,000 crore-odd to state-owned banks and has promised more funds this fiscal after it prodded them to lend more.

But the debate was re-opened on Tuesday when India Ratings warned that any dilution in the government's promise on capital infusion could have an impact on credit ratings of weak banks.

In particular, the ratings and research agency has pointed to cases of sharp deterioration in weak banks such as Central Bank of India and United Bank of India whose losses in the second quarter of the fiscal were close to 10 per cent of their equity with NPAs being the highest contributor.

With the fragile economic recovery, bad loans are likely to rise and for these two banks in particular the net NPA to equity ratio could remain especially high (82 per cent for United Bank and 46 per cent for Central Bank) despite equity infusion by the government.

Meanwhile, India Ratings has also highlighted the need to develop the market for hybrid capital instruments for banks and has called for regulatory clarifications. This, in turn, could help public sector banks raise more capital in case a mounting fiscal deficit puts brakes on the finance ministry's plans of further re-capitalisation of banks.