$13 Billion of government capital infusion have been wiped out due to the losses incurred by Indian Public Sector Banks(PSBs). And the scenario is less likely to improve anytime soon, says rating agency, Fitch.
“Cumulative losses at the State banks were large enough to wipe out almost all of the government’s capital injections of $13 Billion in FY18, and weak performance is likely to continue in the coming year”, said Fitch.
The problem has occured due to the rapid rise in bad loans, following the February 12 revision in the Non Performing Assets(NPA) recognition.
WHAT WAS THE REVISION?
The RBI had revised the NPA recognition code in February. In view of the enactment of the Insolvency and Bankruptcy Code(IBC), 2016, the RBI substituted the existing framework for a simpler code.
According to the revision, the “Lenders shall identify incipient stress in loan accounts, immediately on default”, by tagging the stressed assets as ‘Special Mention Accounts’(SMA).
An overdue of principal or interest payment for,
• 1-30 Days SMA-0
• 31-60 Days SMA-1
• 61-90 Days SMA-2
Fitch added, that the Feb 12 revision is part of a clean-up that should improve the health of the banking sector in the long term.
In the present, however, the revisions have led to a massive increase in the credit costs of the state-run lenders, rising from 2.5% in FY17 to 4.3% in the current year. NPAs for the overall banking sector rose from 9.3% to 12.1% while NPAs for state-run lenders shot up to 14.5%.
Almost all the banks have reported losses in this fiscal year, private and state-run banks alike, including the country’s largest lender, SBI. Axis Bank has also reported it’s first quarterly loss.
Capital buffers at 6 state-run banks dropped below the minimum prescribed by regulators. The banks will have to meet the 8% prescribed, by FY19.
Fitch further underlined that, the $11 Billion capital infusion committed by the government for the upcoming fiscal year will help the banks from breaching regulations, but will not be sufficient for ensuring a stability in the banks’ balance sheets.
Fitch, however, stated that the funding for the state-run banks have remained stable whatsoever, since the depositors and senior creditors have faith that government support will be received.