The rating agency also clarified that there is no case for upgrades in this sector in the near term as asset-quality stress will remain unresolved and capital buffers remain thin, particularly for state-run banks . It also warned that the banks would require $ 27 billion under a stress case scenario.
“Under our latest base case, we do not expect the banking system to require fresh equity capital to meet the minimum common equity Tier 1 (CET1) requirement of 8% until the financial year ending March 2025 (FY25)” Fitch said in a report.” However, the sector would require USD27 billion in fresh capital under our stress case, which incorporates less benign economic assumptions”.
Regulatory forbearance has reduced the Indian banking sector’s need for fresh core capital to meet minimum regulatory capital requirements. according to the ratings firm.
Fitch’s updated assessment, covering a four-year period, reflects the role of regulatory forbearance in suppressing immediate capital requirements by deferring recognition of asset-quality stress and giving banks time to build capital buffers. Last year it had estimated higher system capital needs of $15 billion and $ 58 billion under moderate and high stress scenarios. These stress tests assumed recognition of asset-quality stress over a two-year period.
State owned banks’ capital needs would increase if their loan growth is faster than assumed or if they opt to maintain higher equity ratios. Government capital injections will be crucial to any recapitalisation efforts for state banks, Fitch said. “They have had limited success with equity fund raising compared with private banks since the onset of the Covid-19 pandemic”.
State-run banks have had limited success with equity raising, attracting just $3.1 billion, equivalent to 0.4% of FY21 risk-weighted assets (RWA), since the onset of the pandemic. In contrast, large and mid-sized private banks have raised about $7.6 billion of equity (1.6% of FY21 RWA) since March 2020.