Indian banks need additional $65 billion capital to meet Basel III norms: Fitch

SBI branch at New Colony, in Gurgaon,  on Thursday, August 31, 2017.

Indian Banks will require about $65 billion in additional capital, lower than estimated earlier, to meet the Basel III capital adequacy norms by March 2019 and push loan growth, Fitch Ratings said on Tuesday.

Weak capital positions have a major negative influence on the banks’ viability ratings which will come under more pressure if the problem is not addressed, it added.

“Indian banks are likely to require around $65 billion of additional capital to meet new Basel III capital standards that will be fully implemented by the financial year ending March 2019,” Fitch said.

This is lower than the US-based credit rating agency’s previous estimate of $90 billion, largely as a result of asset rationalisation and weaker-than-expected loan growth.

State-owned banks – which account for 95% of the estimated shortage – have limited options to raise the capital they still require, it said.

“Prospects for internal capital generation are weak and low investor confidence impedes access to the equity capital market,” Fitch said, adding that they are likely to be dependent on the state to meet core capital requirements.

The government is committed to investing only another $3 billion in fresh equity for 21 public sector banks (PSBs) over the current and the next fiscal, having already provided most of the originally budgeted $11 billion.

“Fitch believes the government will have to pump in more than double, even on a bare minimum basis, if it is to raise loan growth, address weak provision cover, and aid in effective NPL resolution,” it said.

The gross non-performing loan (NPL) ratio reached 9.7% in 2016-17, up from 7.8% in 2015-16.

The NPL resolution process being led by the Reserve Bank could potentially release capital if recovery rates are as high as banks and the government are hoping for.

There are 12 currently going through resolution, representing 25% of total system NPLs, and the RBI has recently released a list of 50 more accounts that banks have been directed to resolve within three months or push into the insolvency process.

“State banks are unlikely to be freed from their current gridlock unless NPL resolution is accompanied by additional capital,” Fitch said.