Appreciating the decision of Indian banks to raise fresh capital, S&P Global Ratings on Tuesday said the move will provide stability to the institutions during these rocky times and help them withstand the economic slump amid the COVID-19 pandemic.
"The large capital-raising is credit positive," the agency said in a release adding that "large capital increases across India's financial institutions support the system's stability during these rocky times."
Indian banks that have expressed an intention to raise equity include ICICI Bank (Rs 15,000 crore), Axis Bank (Rs 15,000 crore), Yes Bank (Rs 15,000 crore), State Bank of India (Rs 20,000 crore), Bank of Baroda (Rs 9,000 crore), and Punjab National Bank (Rs 7,000 crore), said S&P.
Others that recently issued large amounts of capital include Kotak Mahindra Bank and IDFC First Bank.
"We believe top-tier Indian private sector banks are adequately capitalised," said S&P Global Ratings credit analyst Michael Puli.
They are raising further capital to strengthen their balance sheets, unlike state-owned banks, which generally have only small buffers over regulatory capital, he said.
"We expect large private sector banks, State Bank of India and a few other major public sector banks to be able to raise capital relatively easily," the release said adding that Yes Bank's follow-on public equity offer at a huge discount to the market price shows that the banks are willing to go the extra mile as well to get sufficient capital.
Further, S&P Global Ratings projected non-performing loans to shoot up to 13-14 per cent of the total loans in the current financial year, from an estimated 8.5 per cent in 2019-20.
It also said credit costs may rise to about 3.7 per cent of average loans in 2020-21.
"This cost should drop to 2 per cent in fiscal 2022, but this would still be above the 15-year average of 1.5 per cent," it said.
According to the release, most Indian public sector banks improved their capitalisation last year, which should provide some support.
The common equity tier-1 (CET1) ratio of public sector banks (PSBs) was 10.1 per cent as of December 31, 2019, higher than the regulatory requirement of 8 per cent (including a capital conservation buffer).
Similarly, PSB' tier-1 capital adequacy ratio was 11.1 per cent, higher than the regulatory requirement of 7 per cent, it said.
The agency expects that government-owned banks in India in aggregate will be able to absorb the estimated credit losses without breaching the regulatory minimum, but these banks need capital to grow.
"In our base case where we have factored in 4-5 per cent credit growth for government-owned banks in the current fiscal year, we estimate these banks need additional capital of Rs 35,000 crore-Rs 40,000 crore this year," it said.
Some finance companies are also looking to bolster capital adequacy to address asset quality issues and improve liquidity, it said.