Rating firm Fitch has revised the sector outlook on Indian banks to ‘negative’ from ‘stable’ implying that there are more downside risks for bank viability ratings (VRs) unless the risks of deteriorating asset quality and weak earnings are counterbalanced by sizeable capital infusions.
It expects Indian banks to require around $90 billion of capital to meet new Basel III capital standards that will be fully implemented by the financial year ending March 2019. More than 50 per cent of the requirement must be met via core equity and the rest largely via Additional Tier 1 (AT1) debt capital instruments.
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Banking sector non-performing assets (NPAs) rose sharply in the financial year ended March 2016 (FY16) as a result of stricter NPA recognition standards. “Asset quality could deteriorate further over the next 12-18 months given the banks’ exposure to stressed sectors, such as infrastructure and iron and steel, and the difficult resolution process for stressed assets in the near term. Earnings for the sector are also likely to be weak due to muted loan growth and high credit costs,” Fitch said in a report.
According to Fitch, Indian banks’ capital positions have historically been weak. The situation has worsened for most public-sector banks due to delayed recognition of problem assets and high loan-loss provisions, and will remain weak in the near term unless the government makes significant capital investment in the banks.