Indian banks struggling with poor asset quality amid challenging environment: Fitch

Fitch Ratings believe that the Indian banking sector is still struggling with poor asset quality and weak core capitalisation.

It said banks' impaired loans ratio has declined to 10.8 per cent in first nine months (April to December) of fiscal 2018-19 from 11.5 per cent in the financial year ending March 2018 (FY 18), marking a reversal in trend.

At the same time, the government's capital injection of over 14.5 billion dollars in FY19 has lifted the capital position for many state banks from recent historical lows.

Nonetheless, capital buffers are still assessed by Fitch as moderate and do not leave much room for growth, while the impaired loans ratio is still very high at several state banks compared with the sector average.

"Resolution of more non-performing loans (NPLs) in current fiscal 2019-20 will be positive for earnings and asset quality, although Fitch believes that most state-owned banks will require further equity injections to pursue meaningful credit growth," it said in a statement.

The rating actions come against the backdrop of a challenging operating environment. Fitch lowered its midpoint for India's operating environment to 'BB plus' from 'BBB minus' following a review of the banking sector's performance -- particularly in the last three years -- and of its regulatory framework as well as the outlook in the near-to-medium term.

"We also compared India with other sovereign jurisdictions in Asia rated in the 'BBB' category -- such as in the key metrics of GDP per capita and the ease-of-doing-business ranking. The likely below-average performance of the sector over the next two years is in spite of our expectations of high economic growth and improving business prospects in India."

The banks -- which still remain the biggest credit intermediaries -- are positioned to leverage this opportunity provided their damaged balance sheets are remediated sustainably with fresh equity that encourages the banks to support growth in a meaningful way, said Fitch.

However, it affirmed the 'BBB minus' long-term issuer default ratings of six banks: State Bank of India (SBI), Bank of Baroda (BOB), Bank of Baroda (New Zealand) Limited (BOB NZ), Punjab National Bank , Canara Bank and Bank of India (BOI), while affirming IDBI Bank's long-term issuer default rating at 'BB plus' with stable outlook.