Suresh Ganapathy of Macquarie Capital estimates credit costs of 700 bps over the next three years for private sector banks, assuming they will roughly restructure 10-15 per cent of the loan book. “Covid-related provisions will be around 350-400 bps of the 700 bps and the balance will be from the normal course of business,” he adds. With the restructuring of loans kicking off soon, he warns it will increase the opacity of financials and the balance sheet of banks may not reflect the true nature of the book.
Banks, so far, have managed to increase their tier-1 capital adequacy by 120-230 bps; YES Bank being an outlier. In a normal scenario of 15-20 per cent growth, this capital would be enough to provide for bad loans and expand the business. But, with July’s non-food credit growth at a tepid 6.7 per cent (that is, in a bleak growth scenario), the advantage of the multiplier effect on capital to expand bank balance sheets is thin. SBICAP Securities has indicated that one-third to half of the fresh capital raised could be allocated to loan loss provisioning. Therefore, the necessity to raise fresh money or growth capital once the situation normalises (by FY22 going by expert estimates) looks high.
Under these circumstances, investors taking fresh exposure to banking stocks
on the back of FY21’s capital raise may be caught on the wrong foot for two reasons — highly unpredictable financials and inevitable equity dilution.