Recap helps weak credit profiles of Indian State Banks

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Mumbai: The Indian government’s USD32 billion recapitalisation programme should help in part to mitigate the risks that Indian state banks face on account of weak asset quality and poor earnings, says Fitch Ratings. However, unwinding of these risks will take some time, implying that resolution of bad assets and continued high credit costs will hinder the sector’s near-term performance. The agency maintains its negative sector outlook to reflect these pressures.

However, the recapitalisation plan for state-owned banks is lower than Fitch’s estimate of USD65 billion for the sector as a whole, although it is a substantial shift considering the drip-feed approach in the past. Government capital injections thus far have fallen short of enabling the banks to meet higher regulatory capital burdens under Basel III in the face of persistent weak earnings. The January 2018 decision to front-load around USD12 billion through recapitalisation bonds would put banks in a slightly better position to absorb losses expected from resolution of NPLs.

Average core capitalisation for the state banks would be likely to reflect a cumulative increase of around 140bp. Fitch believes that large, relatively better positioned banks which are most capable of supporting growth, would receive a greater share of this first capital tranche, leading to a varying impact on capitalisation across banks. In contrast, private-sector banks’ core capitalisation is better, with reasonable buffers, despite the deterioration in their asset quality.

Fitch expects the system’s gross NPL ratio to increase to around 11.5% in FY18 due to further slippages from various identified stressed pools, which will continue to dampen asset quality which is already weak. The pace of slippage should decline, while the system’s weak provision cover ratio remains a key risk to capital. The earnings of a number of state banks remain highly vulnerable, and some may report further losses from realisable values on bad loans being sharply lower than budgeted amounts. In contrast, the earnings of private-sector banks have deteriorated significantly in recent years but still enjoy buffers that can withstand moderate amounts of stress.

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