India’s banking sector expected to face capital shortfalls: Fitch

July 2, 2020
Mumbai/Singapore:  Ratings agency Fitch Ratings on Wednesday said that India’s banking sector is expected to face capital shortfalls due to coronavirus pandemic-related disruption.

According to Fitch Ratings, Indian banks are likely to require at least $15 billion in fresh capital to meet a 10 per cent weighted-average common equity Tier 1 ratio under a moderate stress scenario.

“This rises to about $58 billion in a high-stress situation where the domestic economy fails to recover from the coronavirus pandemic-related disruption,” the agency said in a statement.

“State banks will require the bulk of the recapitalisation, as the risk of capital erosion at state banks is significantly higher than for their privately owned peers.”

Fitch Ratings expect the majority of capital injection to come through in FY 22, as bad loan recognition has been pushed back by a 180-day regulatory moratorium.

“However, a clearer picture should start to emerge from December 2020, unless the central bank agrees to a one-time loan restructuring, which would affect the timely recognition and resolution of bad loans,” the statement said.

“We do not believe the reported performance of Indian banks for the financial year ending March 2020 (FY20) adequately reflects the incipient stress caused by the pandemic. The results are broadly in line with Fitch’s expectations, but bank balance sheets are yet to feel the impact of India’s strict lockdown measures that were implemented by the government from 25 March 2020. Moreover, a meaningful short-term recovery looks unlikely, as the acceleration of new COVID-19 cases threatens the gradual reopening of the economy .”

In addition, Fitch expects heightened asset quality and earning pressure for at least the next two years, as disruption to business activity and supply chains, as well as shrinking personal incomes, damage banks’ balance sheets.

“State banks were more vulnerable than private banks coming into the crisis, with weaker loss-absorption buffers, and appear to be shouldering a disproportionate share of the burden in bailing out affected sectors,” the statement said. IANS