NBFC crisis: Indian banks could face a $50-billion capital shortfall: Fitch

Global rating agency Fitch Ratings on Tuesday said Indian banks might face a capital shortfall of about $50 billion in the event of a systemic crisis in the non-bank financial company (NBFC) sector.

A stress test conducted on Indian banking entities showed that credit profiles of state banks would come under significant pressure. The weakest, including those with Viability Ratings in the 'b' range, would face heightened solvency risks without capital injections from the government, the rating agency said. 

The sector is already $7 billion short of the capital required to meet a 10 per cent weighted-average common equity Tier-I (CET1) ratio — the level that would give it an adequate buffer above regulatory minimums. The gap is estimated to rise to about $50 billion by FY21 under the stress scenario. Banks would also be $10 billion short of the capital required to meet the regulatory minimum of 8 per cent set to apply from the end of March 2020.

The stress test conducted on banks examined the potential impact on banks of liquidity pressures in the NBFC sector developing into widespread failures. The rating agency assumed that 30 per cent of banks' NBFC exposure becomes non-performing. This is close to a worst-case scenario but the figure also reflects the proportion of the sector that is characterised by riskier business and financial profiles.

The agency said it also pictured a scenario where 30 per cent of banks' real estate exposure would become non-performing amid tight liquidity and weak sales. The property development sector is particularly reliant on NBFC financing.

These defaults would reverse the recent progress that banks have made in reducing their non-performing loan (NPL) ratios. The banking system's gross NPL ratio would rise to 11.6 per cent by FY21 from 9.3 per cent at FY19, compared with the agency’s baseline expectation of a decline to 8.2 per cent. Increased credit costs and a weaker economic environment would result in significant losses over the next two years, it said.

Fitch expects the capital shortfall at state banks to be larger; private banks would remain generally above the minimum. Aside from the weaker state-owned banks facing heightened solvency risks in the absence of additional fresh equity, those in the 'bb' category could breach the minimum regulatory additional Tier-I (AT1) threshold of 5.5 per cent CET1, triggering compulsory AT1 write-downs.