The rating agency also clarified that there is no case for upgradation in the sector in the near future as asset-quality tensions will remain unresolved and capital buffers will remain thin, especially for PSBs. It also warned that banks would need $27 billion in the face of stress.
“Under our latest base case, we do not expect the banking system to require fresh equity capital to meet the minimum Common Equity Tier 1 (CET1) requirement of 8% by the financial year ending March 2025 (FY25). Huh” Fitch “However, in case of our tensions, the sector will need USD 27 billion in new capital, which includes less benign economic assumptions,” a report said.
Regulatory tolerances have reduced the Indian banking sector’s new core capital requirement to meet the minimum regulatory capital requirements. As per rating firm.
Fitch’s updated assessment, covering a four-year period, reflects the role of regulatory tolerance in suppressing immediate capital requirements by postponing the identification of asset-quality stressors and giving banks time to build up a capital buffer. Last year it had estimated higher system capital requirements of $15 billion and $58 billion under medium and high stress scenarios. These stress tests assumed recognition of asset-quality stress over a two-year period.
State-owned banks’ capital needs will increase if their credit growth is faster than anticipated or if they choose to maintain a higher equity ratio. Fitch said government capital injections will be crucial to any recapitalization efforts for state banks. “Since the start of the Covid-19 pandemic they have had limited success in raising equity funds as compared to private banks”.
State-run banks have had limited success with raising equity, attracting only $3.1 billion, equivalent to 0.4% of FY21 risk-weighted assets (RWA) since the start of the pandemic. In contrast, large and medium-sized private banks have raised about $7.6 billion in equity (1.6% of FY21 RWA) since March 2020.