New Delhi: Indian banks may need up to Rs 1 trillion over and above their Basel-III capital requirements to manage the concentration risks arising out of their exposure to highly levered, large stressed corporates, India Ratings and Research (Ind-Ra) said Friday.
Of the Rs 1 trillion, public sector banks may need Rs 930 billion, the ratings agency and research firm said in a release.
"The amount is equivalent to an equity write-down of about 1.7 per cent of the banks' risk weighted assets (RWA), and represents the loan haircut that banks may face to revive the financial viability of distressed accounts," Ind-Ra said.
Most exposures are treated as performing and carry minimal loan loss provisions, it said.
"The shortfall may increase government's equity injection requirement from the Rs 700 billion announced on 31 July 2015," it said.
The access to equity will be a critical input to Ind-Ra's rating of additional Tier I bonds, as these instruments carry loss triggers linked to the bank's common equity tier I ratio, it added.
Ind-Ra said if the corporates are able to reduce borrowing costs by 100 basis points or 1 percentage, the shortfall may reduce to Rs 760 billion from the estimated Rs 1 trillion.
While Ind-Ra's analysis indicates a potential haircut on a blended basis at around 23-24 percent; banks may also consider a senior-subordinated structure for the current exposure, it added.
Under this, banks may decide to structure their exposure, particularly to infra projects, with 80 percent in senior debt and remaining 20 percent as subordinate debt.
For the analysis, Ind-Ra studied 30 large stressed corporates, each with individual bank debt of over Rs 50 billion aggregating to about 7-8 percent of the overall bank credit.
As per Ind-Ra's study, banks would need a 24 percent reduction in their current exposure to ensure reasonable debt servicing by these corporates on a sustained basis.
"We expect private sector banks and large PSBs to be better placed in handling potential credit cost hikes from these large stressed corporates, given their sufficient operating and capital buffers.
"However, mid-sized PSBs will be the most affected, given their thin operating margins and weak capitalisation," it added.
