Fitch: Banks will need $15 bn to meet cap norms

MUMBAI: Fitch Ratings today said that Indian banks will likely require recapitalisation of around $15 bln in 2021-22 (Apr-Mar) to meet minimum regulatory capital norms.

However, the capital needs may rise to $58 bln in case the economic contraction is more severe.

The rating agency expects India's economic activity to contract by 5% in current financial year, with considerable downside risk to its forecast.

Considering the government's strained fiscal position, it is doubtful whether banks will be in a position to maintain high level of capital ratios.

Thus, banks will likely hold on to achieve higher loan growth, or resort to balance sheet contraction, in order to maintain above 8% minimum capital requirement.

State-owned banks are likely to account for the bulk of the capital shortfall, as large private banks should stay above the minimum requirements.

However, Fitch said as government is insisting public sector banks to push credit to stressed sectors, it is ultimately the sovereign's onus to address capital shortfalls.

Fitch sees a well-functioning banking sector supporting economic growth of 6-7%, barring which "India's economic uncertainty will continue".

Further, Fitch expects Indian banking sector's impaired loan ratio to rise by around 450 basis points over the 2020-22, while the ratio may rise by 800 basis points in high stress scenario.

Bulk of the stress on lenders' asset quality will come through in 2021-22 due to the Reserve Bank of India's six-month loan moratorium, which will delay the full recognition of stress in the current financial year, Fitch said.