India's public sector banks need USD 65 billion capital infusion, says Fitch

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India's public sector banks need USD 65 billion capital infusion, says Fitch

Fitch today said that weak capital positions have a major negative influence on banks' Viability Ratings which will come under more pressure if the problem is not addressed.

International credit Fitch ratings agency on Tuesday said that India's public sector banks will need capital infusion of USD 65 billion to meet all of global Basel III banking rules by March 2019. The agency today issued a statement and said that weak capital positions have a major negative influence on banks' Viability Ratings which will come under more pressure if the problem is not addressed.

"Capital needs have fallen from our previous estimate of USD90 billion, largely as a result of asset rationalisation and weaker-than-expected loan growth. Even so, state banks - which account for 95 per cent of the estimated shortage - have limited options to raise the capital they still require," the agency said. It further noted that state banks are likely to be dependent on the state to meet core capital requirements.

According to the Fitch, the government is committed to investing only another USD3 billion in fresh equity for 21 state banks over FY18 and FY19, having already provided most of the originally budgeted USD11 billion.

Fitch believes the government will have to pump in more than double, even on a bare minimum basis, if it is to raise loan growth, address weak provision cover, and aid in effective non-performing loan or NPL resolution. The gross NPL ratio reached 9.7 per cent in FY17, up from 7.8 per cent in FY16.

By some account, stressed loans in the public sector banks hit a record USD150 billion at the end of December. Referring to this, Fitch said: "State banks are unlikely to be freed from their current gridlock unless NPL resolution is accompanied by additional capital."

Fitch isn't the only agency to suggest infusion of more capital in the banks. Earlier this month, RBI Deputy Governor Viral Acharya had also advocated for adequate recapitalization of public sector banks to improve the health of the lenders.

Acharya was speaking at an event where he said: "Given the correctly recognized scale of non-performing assets in the books of public sector banks and the lower internal capital augmentation, given their tepid, now almost moribund, credit growth, substantial additional capital infusion is almost surely required."

According to a report in the Mint, Acharya said that even if banks raise capital from other avenues they will still be in need of fund infusion. Former RBI Governor Raghuram Rajan last week made somewhat similar observation about the current situation of banks and said 'banks do need capital'.