Indian banks need an additional $7 billion (Rs 50,000 crore) equity by 2020-21 to support loan growth and cover for bad loans, Fitch Ratings said on Tuesday adding a slowing economy could exacerbate asset-quality tension for a sector grappling with weak recoveries and ageing provisions.
“Non-bank stress coupled with rising macro headwinds pose further challenges for asset quality, particularly at state banks which continue to experience capital constraints, delays in bad-loan recoveries, and poor earnings. More capital is needed to insulate the banks’ weak balance sheets and to sustain loan growth,” it said. Fitch said the rating outlook for most Indian banks mirrors the stable outlook on India’s sovereign rating.
It estimated that “Indian banks will require an additional USD 7 billion of equity by FY’21 (2020-21) to support loan growth, achieve 75 per cent NPL (non-performing loan) cover, and build a buffer over the minimum Basel III capital standards.”
Public sector banks will require most of this capital as the USD 10 billion being injected into banks in 2019-20 will go mainly towards bridging regulatory capital gaps, providing for ageing impaired loans, and absorbing the costs of merging 10 state banks into four by April 2020.
“A slowing economy could exacerbate asset-quality tensions for a sector which is already grappling with weak recoveries and ageing provisions,” it said.
“The improvement in the impaired-loans ratio in 2018-19 is unlikely to be sustained if stresses on non-banks, real estate and SMEs remain unresolved, due to both tight liquidity and the macroeconomic slowdown.”
Net interest margins (NIMs) are likely to face pressure as floating-rate loans have to be linked to external benchmarks in a bid to ensure effective monetary transmission, it said. This will cause a further narrowing in state banks’ income buffers which have declined in recent years due to poor asset quality and lower growth, leaving both earnings and equity vulnerable to higher-than-expected credit costs.”