Public sector banks (PSBs) in India will require a capital infusion of Rs 1.2 lakh crore by 2020, in view of the heavy losses reflected in their balance sheets in 2015-16, global credit rating agency Moody's Investors Service said in a report on Friday.
This is far higher than the additional Rs 45,000 crore capital infusion planned by the government by 2018-19.
"After the release of their results for FY2016, our analysis suggests capital requirements of about Rs 1.2 lakh crore for the 11 rated PSBs, far higher than the remaining Rs 45,000 crore included in the government's budget for capital distribution to the banks until 2020," Moody's Investors Service said in its report titled "Weak Financial Performance Highlights Banks' High External Capital Needs".
The agency said the capitalisation profile of the PSBs will further deteriorate lest the government provides additional capital support.
The government in the budget allocated Rs 25,000 crore for capitalisation of banks during the current fiscal.
The government has in total planned a capital infusion of Rs 70,000 crore till 2018-19, out of which it has already spent Rs 25,000 by March 2016. Apart from the Rs 25,000 crore in the current fiscal, it has planned to spend Rs 10,000 crore each in 2017-18 and 2018-19.
"If additional capital is required by these banks, we will find the resources for doing so. We stand solidly behind these banks," Finance Minister Arun Jaitley had said in this year's budget speech.
The Moody's report said the banks' asset quality is expected to remain under pressure over the next 12 months on account of bad loans to steel and power sector.
As a result, the elevated provisioning expenses will continue to constrain profitability and limit internal capital generation, the report said.
The PSBs suffered suffered losses of Rs 18,000 crore in 2015-16 because of high non-performing assets (NPAs).
Most bank shares are trading below book value, which constrains their ability to use public offerings to raise capital, the report said.
The asset quality review mandated by the Reserve Bank of India in the second half of the fiscal year 2015-16, in an effort to clean up the banks' balance sheets, has adversely affected their profitability.
Nevertheless, the banks also reported improved capital levels on the back of new RBI rules that have broadened their capital base. The rules, amended in March 2016, allow them to recognise revaluation reserves, deferred tax assets, and foreign currency reserves as common equity tier 1 capital, in turn, resulting in a one-off boost to capital levels.