Indian banks will need $15 billion capital to meet Tier I norms: Fitch

Indian banks are likely to require at least $15 billion in fresh capital to meet a 10 per cent weighted-average common equity Tier 1 ratio under a moderate stress scenario, according to Fitch Ratings.

The amount could rise to about $58 billion in a high-stress situation where the domestic economy fails to recover from the coronavirus pandemic-related disruption.

State owned banks will require the bulk of the recapitalisation, as the risk of capital erosion at state banks is significantly higher than for their privately owned peers, rating agency said in a statement.

“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”, it said.

However, a clearer picture should start to emerge from December 2020, unless the central bank agrees to a one-time loan restructuring. The one time -recast would affect the timely recognition and resolution of bad loans.

Fitch said, “we do not believe the reported performance of Indian banks for the financial year ending March 2020 (FY20) adequately reflects the incipient stress caused by the pandemic”. The results are broadly in line with expectations, 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.

Moreover, a meaningful short-term recovery looks unlikely, as the acceleration of new Covid-19 cases threatens the gradual reopening of the economy.

The impaired loan ratios of Indian banks trended down in FY20, in line with our expectations (FY20e: 8.5 per cent; FY19: 9.3 per cent). This was driven by fewer fresh impaired loans and continued write-offs (FY20: 2% of loans). Several state banks also returned to profitability due to easing credit costs, but the banking sector's return on assets was low (FY20e: 0.22 per cent).