Indian banks are expected to need at least $15 billion in fresh capital to reach the 10% weighted average Common Equity Tier 1 level under a moderate stress scenario, Fitch Ratings said Wednesday.
This demand, it added, maybe up to $58 billion in a high-stress scenario where the domestic economy is not recovered from the coronavirus pandemic-related disruption.
Fitch estimates that India’s public-sector lenders would need a major part of the recapitalization, as the possibility of a capital reduction in state-owned banks is considerably higher than that of their private-owned peers.
According to the rating agency, the recorded performance of Indian banks for the financial year ending March 2020 (FY20) does not adequately indicate the incipient stress induced by the pandemic.
The findings are largely in line with its forecasts, Fitch said, but the bank balance sheets are yet to feel the effect of India’s tight lockdown steps that have been enforced by the government since 25 March 2020.
Core capitalization of banks improved by around 90 bps, mostly due to a $9 billion government capital infusion into state banks, coupled with lower inflation, indicating strong risk aversion among banks, it said.
According to Fitch, in spite of the fresh share capital, the core capitalization of the public banks was approximately 350 Bps weaker than that of private banks, leaving their small capital buffers susceptible to stress.
Fitch stated that for at least the next two years, it expects higher asset quality and earning pressures, as disturbances in business activity and supply chains as well as declining personal income will damage banks’ balance sheets.
