Indian banks must have USD200bn fresh capital in the next 5 years: Fitch

In line with Basel III implementation.

India banks will require more than USD200bn in fresh capital as they prepare for the full implementation of Basel III capital requirements by the financial year ending March 2019 (FY19), Fitch said.

According to a release from Fitch Ratings, the core capital position of the Indian banking system is weaker than that of many Asian banking systems that are also migrating towards the Basel III capital norms.

Fitch expects India's state-owned banks to account for 85% of the capital requirement. These banks account for a higher proportion of stressed assets - their stressed assets formed around 12% of total system assets in FY14 compared with 10% for the system - and have lower profitability, which have added to their capitalisation pressures.

Private banks are much better positioned in terms of their capital levels and access to markets.

Here’s more from Fitch Ratings:

Stressed assets in the Indian banking system are likely to peak around FY15, though there will be near-term pressures due to economic slowdown and existing structural and policy-related constraints. Any improvement after that will be gradual.

The Indian banks are likely to raise mostly core equity and Additional Tier 1 capital to meet the capital shortfall.

Capital raising, thus far, has been limited to a few banks, though Fitch expects greater momentum for the latter going forward.

Recent amendments by India's central bank to Basel III capital guidelines have created a more favourable environment for creditors and broadened the pool of investors.

It may take more time for the banks to raise core equity capital because valuations have yet to recover.