A customer waits to deposit Indian 100 rupee banknotes at a counter inside an Axis Bank Ltd. branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Banking Sector Outlook To Stay Negative Till Capital Positions Improve: Fitch

The outlook for the country’s banking sector is likely to remain negative until its capital position strengthens in proportion to the bad loans and weak financial performances, according to Fitch Ratings.

The rating agency said the $151-billion stock of bad loans remains a risk for the sector’s weak income base, which is vulnerable to ageing provisions and slower non-performing loans resolution.

“Outlook on the Indian banking sector is likely to remain negative until the banks address their weak core capital positions against mounting bad debt and poor financial performance,” it said in a report today.

Also read: Housing Downturn Puts $20 Billion Indian Bank Loans at Risk

The capital position of state-run banks banks is most at risk, with the core capital ratios of 11 of the 21 public sector banks below the 8 percent common equity tier 1 regulatory minimum that will come into place at the end of financial year 2019, according to the report.

The rating agency believes the country’s banks will need $40-55 billion in additional capital to meet the Basel-III requirements by 2019.

Of this, the state-run banks will require the bulk of the amount and most of the capital is likely to be used for meeting minimum capital requirements and absorbing non-performing loans provisions, around three quarters of which are in the form of CET1, the report said.

Also read: Fitch Says EM Is Vulnerable as Debt Balloons to $19 Trillion

Fitch Ratings said the government is likely to be forced into providing most of the required capital, since capital raising remains challenging due to state-owned banks' weak equity valuations.

Last October, the government had announced Rs 2.11-lakh-crore capital infusion programme for the state-run banks, spread over two fiscal years—2017-18, and 2018-19.

According to the plan, public sector banks were to get Rs 1.35 lakh crore through re-capitalisation bonds, and the balance Rs 58,000 crore through raising of capital from the market.

Out of the Rs 1.35 lakh crore, the government has infused about Rs 71,000 crore through recap bonds in the banks and the balance would be done during financial year 2019.

The report further said banks’ credit costs rose sharply following regulatory changes aimed at accelerating bad-loan recognition. It resulted in losses that cumulatively eroded nearly all of the $13 billion in government capital injected in 2017-18, adding to capital positions which were already weak, the report said.

In the financial year 2018, loan growth improved to 10.4 percent, from 4.4 percent in 2016-17.

The report believes the sector’s legacy problems have been largely recognised, but the system non-performing loans resolution ratio could witness more upside due to residual stress and new risks emerging out of the retail and SME sectors.

“This improvement was shouldered by a few large banks, and sustaining the growth momentum will be difficult without adequate capital replenishment,” the report said.

The financial of large private sector banks weakened further in 2017-18, but are better than those of their state-owned counterparts, 11 of which are under the central bank’s prompt corrective framework, it added.