Indian state-owned banks will be forced to continue on a path of risk aversion and soft loan growth without adequate capital support from the state, according to Fitch Ratings.
The banks have so far managed to avert further pressure on their weak core capitalisation on the back of regulatory forbearance, limited risk underwriting and lower credit growth. Fitch said it expects a moderately worse operating environment for the Indian banking sector in 2021, anchored to its belief that the banks’ prospects for new business and revenue generation are likely to remain muted.
However, the sector can bounce back faster if state banks — accounting for 60 per cent of sector assets — were substantially recapitalised.
It can potentially mitigate capital risk on account of a weak asset-quality outlook and limited loss-absorption buffers while leaving enough for the banks to benefit from subdued — but very slowly recovering — corporate and consumer confidence — broadly in line with private banks.
State banks’ access to capital markets is currently limited. They collectively raised equity of about 1 billion dollars between August to December 2020 from the capital markets as banks had to settle for considerably smaller amounts even when compared with their modest expectations.
In contrast, large- to mid-sized private banks raised close to 6.8 billion dollars in 2020-2021, adding roughly 125 to 250 basis points in terms of risk-weighted assets versus 20 to 60 basis points by state-owned banks.
Fitch estimate pegs the sector’s capital requirement between 15 billion to 58 billion dollars under various stress scenarios for the next two years, of which state banks account for the bulk.