Bank recap not enough to drive capex; expect more NPAs in realty & telecom

The Government of India (GoI) announced a massive capital infusion into the PSU banks in order to recapitalise them. The inability of PSU banks to raise adequate capital on their own through equity issuances or sale of non-core assets along with large burden of NPAs has left the government with little choice but to recapitalise them. It is possible that now with the setting up of IBC, the government expects PSU banks to recognise NPLs and simultaneously provide the capital.

The thought is that this large infusion of capital will help them provide for bad assets and push up credit growth.

Current Scheme
- GoI announced a Rs. 2.11 trillion recapitalization plan for the capital starved PSU Banks
- Total recapitalization includes Rs. 1.35 trillion via recap bonds and Rs. 760 billion from budgetary support and market raising
- Recapitalisation bond of Rs. 1.35 trillion will be front loaded and we await clarity on the dynamics (Interest rates, timing etc.) and structure of the recapitalization bonds
- Out of the Rs 760 billion, Rs. 180 billion will come budgetary allocation of GoI (as announced in Indradhanush Scheme) and remaining Rs 580 billion will be raised by the individual banks from the market
- Contours of the current programme will be finalised by December 2017.

The government will allocate funds to the banks after analysing their performance, size and capital requirements.

As per a rating agency Rs 1.6 trillion of capital will go towards increased provisioning requirements, about Rs 0.5 trillion would be required to meet Basel III solvency requirements and about Rs 0.4 trillion for implementing Indian Accounting Standards (IND AS) norms.

So, in effect, we are already short by about Rs 0.4 trillion. This amount does not take into account growth capital assuming a capex cycle pick up and will just help the banks to keep afloat.

As per the agency, meaningful Cap-ex will happen only beyond FY20. Capital utilisation on a value basis is at 60-65 per cent and on volume basis is at 70-75 per cent and such low levels will cause delay in capex recovery.

Larger steel companies’ capex utilisation is good but the smaller ones have very low utilisation and hence system as a whole is running sub optimal capex utilisation. The National Company Law Tribunal ( NCLT) process will further delay Cap-ex as a lot of small and weak players in the sector have very low capacity utilisation.

It is estimated that more than 40 per cent of the corporate book is shown as stressed assets for banks. Going forward, we can see more NPAs coming from sectors like power, telecom and real estate, where recognition of NPAs has been inadequate. The agency estimates total system gross stressed assets including all kinds of forbearance like SDRs, 5/25, SRs etc, at about Rs 9.3 trillion with effective provision coverage of just 35 per cent on them, implying that credit costs will remain high.

The agency has researched about 18,500 companies and found stress still remains high. Debt-weighted rating downgrades continue to outnumber upgrades and downgrades are largely coming from capital-intensive sectors with a few upgrades seen in auto and auto ancillary sector. Within power, the thermal space has seen downgrades and there are worries in this space.

The silver lining, though, is retail where overall asset quality is fine. Overall, based on the capital requirement and level of NPAs, it seems current capital infusion may not suffice in the event of a capex recovery.