Forbearance gives Indian banks time to build capital buffers: Fitch

No need for equity capital till FY25 to meet 8% CET1 level

Rating agency Fitch today said the regulatory forbearance has reduced the Indian banking sector’s need for fresh core capital to meet minimum regulatory capital requirements. Under the base case, the sector will not need fresh equity capital to meet the minimum common equity Tier 1 (CET1) requirement of eight per cent until the financial year ending March 2025 (FY25).

"However, the sector would require $27 billion in fresh capital under a stress case, which incorporates less benign economic assumptions," Fitch said.

In 2020, the agency had estimated higher system capital needs of $15 billion and $58 billion under moderate and high stress scenarios. These stress tests assumed recognition of asset-quality stress over a two-year period.

"Our updated assessment, covering a four-year period, reflects the role of regulatory forbearance. The forbearance suppresses the immediate capital requirements by deferring recognition of asset-quality stress and giving banks time to build capital buffers," Fitch added.

Public sector banks would not require additional equity injections to meet minimum capital thresholds until FY25 under our base case. But their capital needs would increase if their loan growth is faster than we assume.

State capital injections will be pivotal to any recapitalisation efforts for state banks. They have had limited success with equity fund raising compared with private banks since the onset of the Covid-19 pandemic.

The rating agency ruled out the possibility of Viability Rating (VR) upgrades in the near term under base case. The asset-quality stress will remain unresolved and capital buffers remain thin, particularly for state banks. Lower VRs would be more probable under our stress case, which would also likely warrant a lower operating environment score for India’s banks, it added.