The undertaken by Fitch’s unit India Ratings and Research (Ind-Ra), the market-dominating public-sector banks would require around INR930bn to deal with the stressed loans.
This means the government may have to inject more equity into the banks than the INR700bn that was announced on 31 July.
If the companies cut down their borrowing costs by 100 basis points, the shortfall could reduce to INR760bn from the estimated INR1trn.
Ind-Ra has analysed 30 large stressed corporates, with each them having an individual bank debt of over INR50bn that aggregates to about 7%-8% of the overall bank credit. All these companies are said to have seen a significant increase in their leverage over the last few years.
"The study reveals that banks would need a 24% reduction in their current exposure to ensure reasonable debt servicing (1.5 times of interest coverage) by these corporates on a sustained basis. For PSBs which have about 90% share of this exposure, this amount comes to around INR930bn or about 1.7% of their FYE15 RWA.
"Assuming the banks provide for this haircut either as a provision ramp-up or by building additional capital buffers, this exposure can add significantly to Ind-Ra’s estimate of INR2.4trn of CETI needed for the Basel-III transition," the report added.
Mid-sized banks are expected to be affected the most owing to their thin margins and weak capitalization.
Image: Public sector banks in India would require INR930bn to handle stressed loans. Photo: courtesy of Cooldesign / freedigitalphotos.net.
