Outlook on Indian banks to stay negative over weak core capital: Fitch

Indian banks need to improve capital base against mounting bad debt and poor financial performance, Fitch said

Fitch Ratings on Monday said its outlook on Indian banking sector is likely to remain negative until banks, especially the public sector ones, address their weak core capital positions.

They need to improve capital base against mounting bad debt and poor financial performance, Fitch said.

The capital position of state banks is at risk. The core capital ratios of 11 of India's 21 state banks are below the 8 per cent minimum common equity Tier 1 (CET1) ratio that comes into place at the end of March 2019 (FYE19). 

The rating agency, in a statement, said banks' credit costs rose sharply following regulatory changes aimed at accelerating bad-loan recognition and led to losses. These losses cumulatively eroded nearly all of the $13 billion in government capital injected in FY18, adding to capital positions which were already weak. 

Indian banks will need $40 billion-$55 billion in additional capital to meet Basel III requirements by 2019, with state banks requiring the bulk of this amount.

Most of the capital is likely to be used for meeting minimum capital requirements and absorbing NPL provisions, around three quarters of which are in the form of Common Equity Tier 1 ( CET1).

The state is likely to be forced into providing most of the required capital since capital raisings remain challenging due to state banks' weak equity valuations, Fitch said.

Indian banks' Q1FY19 performance improved slightly on declining credit costs and a steady loan growth. However, the $151 billion stock of bad loans remains a risk for the sector's weak income base, which is vulnerable to ageing provisions and slower NPL resolution, it added.