Global rating agency, Fitch Ratings in its latest report has said that Indian banks will require an additional $7 billion (Rs 50,000 crore) equity by FY21 (2020-21) in order to support loan growth, achieve 75 percent non-performing loan (NPL) cover, and build a buffer over the minimum Basel III capital standards. It also said that slowdown in economy could worsen asset-quality tensions for a sector which is already struggling with weak recoveries and ageing provisions.
According to the report, public sector banks (PSBs) need most of this capital as the $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. It noted that 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.
Rating agency further said that net interest margins (NIMs) are expected to face pressure as floating-rate loans have to be linked to external benchmarks in a bid to ensure effective monetary transmission. It also pointed out that 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. It added that the systemic stress across non-banks would deal a significant setback to recovery in the banking sector, reversing recent improvements in performance, and posing solvency risks to banks with the thinnest buffers.