Mumbai: Even as efforts to clean up the balance sheets of banks initiated by the RBI is under way, Indian banks have a $90- billion challenge before them. Indian banks will require around $90 billion of capital to meet the new Basel III capital standards that will be fully implemented by March 2019, according to Fitch Ratings. The situation is more precarious as the banks have to make a high 70 per cent provision to cover problem loans when their core capital buffers have been weakened by the sharp rise in their non-performing loans (NPLS).
More than 50 per cent of this $90 billion must be met via core equity and the rest largely via additional tier 1 debt capital instruments and here lies the challenge as their assets are qualitatively weak and they will not be able to generate internal capital apart from the fact that they are in no position to assess the capital markets. Fitch estimates that the capital needs of public sector banks form about 80 per cent of the system total. It expects banks’ stressed asset ratio to peak around FY17, although the recovery will depend on NPL resolution and credit growth.
There will be fewer additional bad loans as banking reforms kick in, but resolving problem loans will be a difficult process for the state banks, which have average stressed asset ratio of 14.5 per cent compared with 4.5 per cent for the private banks. Reforms measures, however, are expected to be positive for the sector over the long term, says Fitch.
