Fitch Ratings on Wednesday said the Centre’s Rs 48,000-crore ($7 billion) capital infusion in PSU banks would not be sufficient to support significantly strong lending growth.
The ratings agency estimates that banks will need an additional $23 billion (around Rs 1.6 lakh crore) in 2019, even after these latest injections, to sufficiently meet the minimum capital standards and have surplus capital for growth.
According to Fitch, the Indian authorities’ approach to the banking sector has clearly shifted towards spurring lending in recent months. However, it hastened to add that such steps, along with capital injections, have eased but not removed capital constraints on bank growth.
“The Indian government’s announcement on February 21 that it will soon inject $7 billion into state-owned banks under its recapitalisation plan is likely to help banks meet the minimum regulatory requirements but is not sufficient to support significantly stronger lending growth,” it said in a report titled “Indian government’s bank recap may not unlock faster growth”.
It added that a large proportion of the government’s latest round of recapitalisation is still likely to go towards addressing regulatory shortfalls rather than to support asset growth.
Fitch, however, said more will be needed as a cushion against future losses at some state banks as borrower defaults and slow bad loan resolution continue to put pressure on non-performing loan provisions.
On banks recently exiting the RBI’s prompt corrective action (PCA) framework, Fitch said leaving the PCA mechanism will not remove the constraints on growth unless the state injects more capital into these banks.
