Fitch Rating today held out a negative outlook on the country's banking sector, citing weak capital position and financial performance.
The global rating agency said banks look vulnerable with poor capitalisation and without adequate support from the state and capital markets.
"The negative outlook is based on our assessment that the banking sector's weak core capitalisation continues to pose downside risks to standalone credit profiles amid expectations of continued poor loan growth, weak earnings, volatile asset quality and elevated credit costs," the agency said in a report.
Banks will need USD 65 billion in additional capital to meet Basel III requirements by March 2019 with the state-run banks alone requiring more than 90 per cent of this, it said.
Some of the state-run banks are planning to raise fresh equity from the markets this financial year but it will not be easy due to low investor confidence and bleak earnings prospects.
"Government will have to pump in significantly more even on a bare minimum basis if it is to address the system- related risks of huge NPAs, weak provision cover and poor loan growth," the report said.
However, the report said, private sector banks are well-placed although they have been under pressure due to deterioration in asset quality.
The agency believes the asset-quality outlook could remain challenging in the next 12 months due to incipient stress in the power sector and concerns about farm loan waivers and SMEs.
Gross NPA ratio touched 9.7 per cent in FY17.
The report said satisfactory resolution of large stressed loans is going on under the RBI's oversight and it can have a positive effect on NPAs.
Provisions are likely to rise in the interim as NPA cover is moderate at 40-50 per cent, it said.
It expects banks' earnings to remain subdued in the near term. "Banks will find it difficult to manage elevated credit cost pressures as income generation will suffer due to the income loss from NPAs and the weak growth outlook," it said.
Treasury gains and sale of non-core assets may provide support but state-run banks are unlikely to see any meaningful revival in earnings this year as they reported consecutive negative return on assets in the previous fiscal.
Loan growth, which slumped to 4.4 per cent in FY17, lowest in several decades, is expected to remain subdued for the foreseeable near-term, the report concluded.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)