Indian banks are likely to require at least $15 billion in fresh capital to meet a 10% weighted-average common equity tier 1 ratio under a moderate stress scenario, Fitch Ratings said in its recent report.
This requirement, it said, could go up to $58 billion in a high-stress situation where the domestic economy fails to recover from the coronavirus pandemic-related disruption.
Fitch believes that India’s public sector lenders will require the bulk of the recapitalisation, as the risk of capital erosion at state-owned banks is significantly higher than for their privately owned peers.
“We expect the majority of the injection to come through in FY22, as bad loan recognition has been pushed back by a 180-day regulatory moratorium. However, a clearer picture should start to emerge from December 2020, unless the central bank agrees to a one-time loan restructuring, which would affect the timely recognition and resolution of bad loans,” said Fitch.
According to the rating agency, the reported performance of Indian banks for the financial year ending March 2020 (FY20) does not adequately reflect the incipient stress caused by the pandemic.
The results are broadly in line with its expectations, Fitch said, but bank balance sheets are yet to feel the impact of India’s strict lockdown measures that were implemented by the government from 25 March 2020.
The core capitalisation of banks improved by about 90 bps, mainly due to a $9 billion government equity injection into state banks coupled with lower growth, implying high risk aversion among banks, it said.
According to Fitch, the core capitalisation of state-owned banks was about 350 bps weaker than that of private banks, despite the fresh equity, leaving their limited capital buffers susceptible to stress.
Fitch said it expects heightened asset quality and earning pressure for at least the next two years, as disruption to business activity and supply chains, as well as shrinking personal incomes, damage banks’ balance sheets.