Mumbai, March 17: Local banks will need $140 billion over the next five years to not only meet Basel III norms but also make provisions against bad loans and cater to asset growth demands.
Of the $140 billion, they will need $15 billion just to clean up non-performing assets (NPAs).
While close to 70 per cent of the entire capital requirement is expected to be met through internal accruals, the remaining $40 billion will come from external sources.
Basel III is the new framework designed by central banks across the world following the 2008 financial crisis and aims to create more capital buffers to meet any eventuality arising from business cycles.
Many lenders, particularly state-run banks, have witnessed a spurt in bad loans because of the slowdown in the domestic economy. Bankers maintain that the problem is likely to persist in the next fiscal as well.
However, there are a few who aver that the asset quality has weathered the worst and the pace of growth of bad loans is likely to decline in the coming months.
According to a note prepared by IDFC Securities, the stress on bank asset quality is likely to play an important role in the overall capital requirement. In the next five years, the brokerage estimates bad loans to peak to 12 per cent of total loans from around 10 per cent at present.
It is feared that if stress levels increase beyond this and move to the worst-case scenario of 15 per cent of the total loan book, the external capital requirement of banks will rise to around $50 billion. On the other hand, the requirement is projected to fall to around $35 billion if banks are successful in bringing down their non-performing assets.
Manish Chowdhary and Sameer Bhise, analysts at IDFC Securities, said in the previous asset quality cycle during the late 90s, close to 96 per cent of the total capital requirement was funded through internal accruals and bond gains. Bond gains contributed around 68 per cent to the total capital required. Moreover, the government’s capital infusion in listed banks during that period was almost nil.
However, this time, banks will not derive any significant benefit from bond prices. They will have to depend on internal accruals and tap the market for funds.
Speaking to The Telegraph, a senior official from a PSU bank said fund-raising of such a magnitude would prove to be challenging over the next five years. “The government will have to frequently come out with capital infusion into the banking sector. As far as banks are concerned, they will have to bring down their NPAs and improve their profitability to get good investor response,” he added.
It is estimated that the State Bank of India will alone need around $12 billion over the next five years.