Global credit rating agency Fitch Ratings has warned that some Indian banks, particularly mid-sized state-run banks, are at the risk of skipping coupon payments on capital instruments over next couple of years. "The weakest state banks remain most at risk of breaching capital triggers and skipping coupon payments," Fitch said in a report. Rising bad loans and poor earnings have hurt the financial health of many state-run banks. "NPL (non-performing loan) growth continued and the NPL ratio for the system remained on an upward trend. NPL ratios are particularly high at state-owned banks - around three times as high as the ratios at private-sector banks," Fitch said.
The rating agency has called for more fund infusion into the state-run banks. The government has earmarked Rs 70,000 crore for capital infusion into state-run banks over next few years. But "persistent losses and capital erosion through the last five quarters emphasise the need for more capital to allow banks to address their ongoing capital needs to meet required provisioning and to support balance sheet growth," Fitch said.
The situation is particularly critical for mid-sized state banks that have seen the sharpest deteriorations in their financial profiles in the last few years, the ratings agency added.
According to Fitch, persistent losses and weak internal capital generation have put some banks at risk of additional tier-1 or AT1 coupon deferrals due to a lack of adequate distributable reserves. State-owned banks have the most pressing problems with their distributable reserves on a clear negative trend over the last couple of years, Fitch said.
Many public sector banks have raised capital through AT1 bonds or additional tier 1 bonds, which typically have no maturity date. Banks continue to pay interest forever until they repay the principal after a specified period.
The RBI's recent decision to allow banks to make additional Tier 1 (AT1) coupon payments from statutory reserves may have helped mitigate short-term coupon-deferral risks, but state banks' reserves are likely to continue falling, Fitch said.
The RBI has made several regulatory adjustments in the last few years to avoid potential damage to sentiment in the domestic market for capital instruments, Fitch said.
Fitch said Indian banks need around $90 billion fresh capital by 2019 to meet Basel III standards and government owned banks account for around 80 per cent of that. Basel III is a comprehensive set of global reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. (With agency inputs)