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Business News/ Industry / Banking/  Capital to continue to remain a challenge for state-owned banks: Fitch
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Capital to continue to remain a challenge for state-owned banks: Fitch

State-owned banks in particular are struggling with low capitalization and poor earnings, the Fitch report said

The government’s plan to dilute its stake in public sector banks to 52% by 2019 and infuse capital into them will have to wait till there is meaningful recovery in valuations, said Fitch. Photo: AFPPremium
The government’s plan to dilute its stake in public sector banks to 52% by 2019 and infuse capital into them will have to wait till there is meaningful recovery in valuations, said Fitch. Photo: AFP

Mumbai: While Indian banks started slowly charting their path to stability in the April-September period this year, capital concerns still remain, international ratings agency Fitch Ratings Inc. said in its report on Friday.

State-owned banks, which account for 90% of the stressed assets in the Indian banking system, in particular are struggling with low capitalization and poor earnings, the report said. In comparison, the large private banks are significantly better capitalized than their state-owned peers.

The progress of public sector banks in strengthening capital “has been slow despite relatively weak capital levels and a low internal rate of capital accretion. Access to core equity continues to be difficult due to below-book valuations," the report said.

Even though these banks are allowed to issue additional Tier I (AT1) instruments to shore up capital, only two banks, Bank of India and IDBI Bank Ltd, have accessed the market so far this year, raising 2,500 crore each.

“The combined sum constituted only about 5% of the Fitch Ratings-estimated total AT1 requirement over 2015 and 2016, implying that a significant gap is yet to be filled," Fitch said.

The government’s plan to dilute its stake in public sector banks to 52% bmy 2019 and infuse capital into them will have to wait till there is meaningful recovery in valuations, according to the ratings agency. Owing to muted credit growth during the year and bad loan problems, Fitch expects pressures on interest income and high credit cost for banks, leading to a very slow recovery.

Even though the gross non-performing loan (NPL) mratio only rose marginally to 4.2% in the April-September period from 4.1% as on 31 March, there has been a significant rise in restructured assets, which has led to stress in the system. As a result, stressed asset ratio, the sum of gross NPLs and restructured assets, in the system was up by 60 basis points in the first six months of this fiscal year, as compared with the beginning of the year, and stood at 9.7% as on 30 September. One basis point is one-hundredth of a percentage point.

“Fitch believes there will be more restructuring in 2H15 (second half of 2014-15), but expects stressed assets to eventually improve after FY15 (March 2015). This is only likely to happen slowly as structural problems related to infrastructure will be difficult to address within a short time span," the report said.

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Published: 12 Dec 2014, 02:01 PM IST
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