Inadequate capitalisation threatens PSU banks: Fitch

Inadequate capitalisation is a threat to Indian public sector banks, and their "high dependence" on the government for core equity is likely to continue, credit rating agency Fitch said today.

"Capital adequacy at India's state banks remains a key theme against deteriorating asset quality and weak earnings, with some banks at risk of breaching their capital triggers," the agency said in a report.

The banks' sharply deteriorating financial positions are adding to capital pressure at a time when progressively higher minimum Basel III capital requirements are being phased in.

"State banks' high dependence on the state for core equity is likely to continue. However, there are signs that the overseas additional Tier 1 (AT1) market could gain momentum as long as pricing differences are addressed," the report said.

Fitch said it does not expect a "meaningful near-term" earnings recovery due to incremental loan loss provisions and subdued credit growth.

Indian banks' asset-quality indicators are close to their weakest levels and Fitch expects the outlook on asset quality to remain challenging for the next 12-18 months, with the stressed asset ratio for all banks reaching around 12 per cent in FY17.

"A meaningful recovery depends on the pace of NPL resolution and credit growth," it added.

Stress prevalent in weak sectors, which account for a large share of special mention loans will increase demand for provisioning and put pressure on earnings against a backdrop of weak growth forecasts.

The report also said the rise in NPL at Indian banks is likely to moderate from the sharp 2015-16 increase, but bank exposure to highly stressed sectors, including steel and infrastructure, remains significant.

Government has committed to injecting USD 11 billion of capital in public-sector banks by 2018-19.

However, Fitch estimates that around USD 90 billion needs to be injected for banks to fulfil ongoing capital needs and adhere to Basel III norms.