Global rating agency, Fitch Ratings in its latest study showed that amid systemic crisis in the non-banking financial company (NBFC) sector, banks may face a capital shortfall of about $50 billion (about Rs 3.5 trillion). As per a stress test conducted by Fitch, the credit profiles of the state-owned banks would come under significant pressure, and the weakest -- including those with Viability Ratings in the ‘b’ range -- would face heightened solvency risks without capital injections from the government.
It said ‘we assume that 30% of banks' NBFC exposure becomes non-performing. We view this as close to a worst-case scenario, but the figure also reflects the proportion of the sector that we believe is characterised by riskier business and financial profiles. We also assume 30% of banks' property exposure becomes non-performing, due to tight liquidity and weak sales.’ it also said the property development sector is particularly reliant on NBFC financing and added that these defaults would reverse recent progress that banks have made in reducing their non-performing asset (NPAs) ratios.
The study estimated that the banking system's gross NPA ratio would rise to 11.6% by 2020-21 from 9.3% at 2018-19. It said increased credit costs and a weaker economic environment would result in significant losses over the next two years. According to the study, the gap would rise to about $50 billion by FYE21 under the stress scenario. Banks would also be $10 billion short of the capital required to meet the regulatory minimum of 8% that is set to apply from end-March 2020. The stress test examines the potential impact on banks of liquidity pressures in the NBFC sector developing into widespread failures.
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