Mumbai: Fitch Ratings on Friday said the heavy losses and capital erosion reported by Indian banks in their results for FY18 would put further pressure on their viability ratings. It noted that the cumulative losses at the state banks were large enough to wipe out almost all of the government’s capital injections of $13 billion in FY18, and weak performance is likely to continue in the coming year.
The rating agency noted that losses were reported at 19 of the 21 state banks in FY18, including State Bank of India (SBI), while earnings at the large private banks also came under significant pressure, with Axis Bank reporting its first-ever quarterly loss.
“These losses have put further pressure on capital ratios,” Fitch said. According to it, six state-owned banks reported common equity Tier 1 (CET1) ratios that did not meet the regulatory minimum capital conservation buffer levels of 7.375 per cent in March 2018, including PNB, the second-largest state bank.
The government has earmarked another $11 billion for recapitalisation in FY19, which should help banks to avoid breaching regulatory triggers. However, Fitch said more government capital is required to stabilise banks’ balance sheets, meet regulatory requirements and support growth — given that there could be further losses over the next few quarters.
“It is also possible that more state banks will be placed in the RBI’s “prompt corrective action” (PCA) framework, which allows the central bank to intervene in a banks’ management, as most are in breach of at least one risk threshold. 11 state banks are already under the PCA framework,” Fitch added.
On an optimistic note, it said that the regulatory efforts to speed up problem-loan resolution could release capital if recoveries prove higher than current provisions, as was the case in some recent resolutions.
Fitch believes that some of the 40 large non performing loan (NPL) accounts currently in the insolvency courts — which constitute 40 to 50 per cent of the NPL stock — could be resolved in FY19, although there remains a risk of legal delays.
