Capital requirements Rs10,000-20,000cr in FY21

Public Sector Banks (PSBs), expecting improved earnings and new capital requirement not being sizeable, are expected to raise funds from the markets, said financial consultancy ICRA Ltd.

“Since the capital requirements are not sizeable and are based on the expectation of improved earnings, we expect banks to raise this amount themselves from the markets,” said ICRA in pre-budget comments on 21 Jan 2020.

It is also expected further provisioning on stressed loans of the PSBs, which would help them exit the Reserve Bank of India’s prompt corrective action framework as these banks are expected to turn profitable in FY2021.

After the sizeable capital infusion of Rs.2.66 lakh crore during FY2018-2020, the PSBs capital position has improved from that of FY2017, ICRA pointed out.

Accordingly, the capital requirements are expected to be limited to Rs.10,000-20,000 crore during FY2021 for 8-10% credit growth.

However, if the Government decides to provide capital to enable PSBs transition to Indian Accounting Standard (IND-AS), banks will be required to make credit provisions on expected loss basis for standard but overdue exposures.

In such a scenario, ICRA expects the capital requirements of PSBs to be higher, at around Rs.70,000-1 lakh crore.

The growth in the NBFC/HFC loan books was lower in 2019-20, when compared with the five-year average, largely because of the funding challenges faced by the NBFCs/HFCs.

At the same time, the credit demand was impacted as retail borrowers adopted a wait-and-watch policy, especially in the case of home loan purchases.

Increased tax incentives, for first-time home buyers, such as extension of additional tax deduction for interest paid on loans borrowed beyond 31 March 2020 and increased allocation under PMAY, could help boost the demand for housing loans, especially in the affordable housing segment.

Also, increased allocation under Affordable Housing Fund (AHF) will provide long-term funds to HFCs/Banks for housing loans and extension of the partial credit guarantee scheme for first loss beyond 30 June 2020, for purchase of high-rated pooled assets of NBFCs could help in improving the fund flow to the NBFC/HFC sector.

Further, in line with the Government’s focus on infrastructure growth, the Credit Guarantee Enhancement Corporation for infrastructure financing could be set up, as announced in the previous budget, and more clarity on the role of Government-sponsored NBFCs in the infrastructure financing space could be provided.

Despite the decline in interest rates in the last year, ICRA is apprehensive that the asset quality pressure in the retail segment would worsen, given the slow GDP growth; consequently, the uptick in consumption would be imperative for improvement in the credit profile of entities in the financial sector, said ICRA.

The Finance Minister is due to present Budget on 1 Feb 2020. Fiinews.com

Capital requirements Rs.10,000-20,000 crore in FY21

Public Sector Banks (PSBs), expecting improved earnings and new capital requirement not being sizeable, are expected to raise funds from the markets, said financial consultancy ICRA Ltd.

“Since the capital requirements are not sizeable and are based on the expectation of improved earnings, we expect banks to raise this amount themselves from the markets,” said ICRA in pre-budget comments on 21 Jan 2020.

It is also expected further provisioning on stressed loans of the PSBs, which would help them exit the Reserve Bank of India’s prompt corrective action framework as these banks are expected to turn profitable in FY2021.

After the sizeable capital infusion of Rs.2.66 lakh crore during FY2018-2020, the PSBs capital position has improved from that of FY2017, ICRA pointed out.

Accordingly, the capital requirements are expected to be limited to Rs.10,000-20,000 crore during FY2021 for 8-10% credit growth.

However, if the Government decides to provide capital to enable PSBs transition to Indian Accounting Standard (IND-AS), banks will be required to make credit provisions on expected loss basis for standard but overdue exposures.

In such a scenario, ICRA expects the capital requirements of PSBs to be higher, at around Rs.70,000-1 lakh crore.

The growth in the NBFC/HFC loan books was lower in 2019-20, when compared with the five-year average, largely because of the funding challenges faced by the NBFCs/HFCs.

At the same time, the credit demand was impacted as retail borrowers adopted a wait-and-watch policy, especially in the case of home loan purchases.

Increased tax incentives, for first-time home buyers, such as extension of additional tax deduction for interest paid on loans borrowed beyond 31 March 2020 and increased allocation under PMAY, could help boost the demand for housing loans, especially in the affordable housing segment.

Also, increased allocation under Affordable Housing Fund (AHF) will provide long-term funds to HFCs/Banks for housing loans and extension of the partial credit guarantee scheme for first loss beyond 30 June 2020, for purchase of high-rated pooled assets of NBFCs could help in improving the fund flow to the NBFC/HFC sector.

Further, in line with the Government’s focus on infrastructure growth, the Credit Guarantee Enhancement Corporation for infrastructure financing could be set up, as announced in the previous budget, and more clarity on the role of Government-sponsored NBFCs in the infrastructure financing space could be provided.

Despite the decline in interest rates in the last year, ICRA is apprehensive that the asset quality pressure in the retail segment would worsen, given the slow GDP growth; consequently, the uptick in consumption would be imperative for improvement in the credit profile of entities in the financial sector, said ICRA.

The Finance Minister is due to present Budget on 1 Feb 2020. fiinews.com