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Mitali Bhutta made post

How much fresh capital will the Indian banking system actually require?

Answer
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Dawn Cherian answered.
1 month ago


According to an estimate put out by Fitch Ratings, Indian banks are likely to require at least $15 billion in fresh capital to meet a 10% weighted-average Tier-1 ratio. It is estimated that in the event of a high stress situation, this capital requirement could go up to $58 billion. This is very likely scenario if the domestic economy fails to recover from the pandemic.

As per Fitch, the Indian PSU banks will account for the bulk of the recapitalisation needs as the risk of capital erosion in these PSU banks is much more acute compared to the private sector counterparts. However, Fitch also expects that a bulk of the infusion will come in FY22 as that is when the bad loans recognition will be clear post the 180-days moratorium.

On the positive side, Fitch also confirmed that the core capitalisation of banks had improved by 90 bps on the back of a $9 billion government equity injection into state banks during the previous fiscal year. This was also supported by greater risk aversion among banks. Fitch also noted that the core capitalization of PSU banks was 350 bps weaker than private banks.

What could be disconcerting as pointed out by Fitch is that there could be heightened asset quality and earning pressure for at least the next two years. That is because, the disruption to business activity and supply chains will hit the supply side while the collateral damage to consumer demand and credit demand will also damage banks' balance sheets.