If there isn't meaningful action to restore their capital adequacy, the standalone credit profile of many Indian public sector banks (PSBs) could come under pressure, says Fitch, the global ratings agency.
Last week, several large PSBs reported significant quarterly losses. These underscore long-standing balance sheet and capital risks, legacy issues pertaining to poor asset quality and weak provisioning, Fitch said on Friday.
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Fitch's estimate of the system's need for capital is $140 billion or Rs 9.6 lakh crore. With some of the losses, this might need revision, though not by much, as Fitch has for long assessed India's banking system on a stressed-asset basis, not only non-performing loans. The agency also factored in its ratings the under-provisioning at PSBs.
The sudden deterioration in profit at many lenders for the December quarter was triggered mainly by higher provisioning due to the reclassification of certain loans. Pressure from the Reserve Bank of India (RBI) was a key factor for the bulk of the reclassification. The central bank had nudged all lenders, public and private, to identify all stressed accounts and significantly raise provisioning over two quarters.
It is unusual for RBI to be driving state banks to raise provisioning so quickly and indicates that earnings pressure will continue in the March quarter and possibly beyond. The intention to clean the banks' balance sheets by FY17, as a pre-requisite to revive credit growth, could help to revive investor confidence in PSBs. The suddenness and speed of the provisioning in the second half of this financial year highlights how long it has taken to address the issue, of poor balance sheets.
It also raises questions, notes Fitch, over the pace and implementation of bank recapitalisation and reforms, when central bank intervention is required for identification of bad assets. The provisioning at state banks has been weak and significant new capital is necessary to maintain credit profiles. The effect on earnings and credit profiles would have been less dramatic if the provisioning process had been spread over a longer period, Fitch added.