Global ratings agency, Fitch Ratings in its latest report titled ‘2017 Outlook: Indian Banks’ has re-affirmed its ‘negative’ outlook for India’s banking sector, saying the financial standing remained fragile without bigger capital injections and that the government’s action on banknotes could end up having a mixed impact. It added that the government’s move to remove higher-value banknotes from circulation would lead to a surge in deposits, allowing lenders to eventually lower lending rates and lower costs to service the sector’s debt.
The report said that the negative outlook on the banking sector suggests there may be more downside risks for bank Viability Ratings (VRs) if the risks of deteriorating asset quality and weak earnings are not counterbalanced by larger capital injections. Though, it added that the overall impact on the banking sector remained cautions, as borrowers in sectors that depend on cash could struggle to service their loans, while deposits could eventually be withdrawn again, among other factors. The ratings agency expects additions to bad loans to slow, although high loan-loss provisions for both new and old non-performing loans would keep profits under pressure.
The ratings agency said its outlook on asset quality will remain challenging for the next 12-18 months, with the stressed-asset ratio for the banking system reaching around 12 percent in financial year 2016-17 as against 11.4 percent in financial year 2015-16. Fitch expecting a small improvement in the sector’s return on assets (ROA) in the financial year 2016-17 as earnings will remain under pressure due to muted loan growth and high credit costs. It said that the risks for creditors will remain high until the banks raise additional capital. The agency, which had previously estimated Indian banks would need about $90 billion in total capital by March 2019 to meet global Basel III banking rules, said 80 percent of those capital requirements would arise in the next two financial years.
