Banks may face capital crunch of $50 billion if NBFC crisis drags: Fitch

Rating agency Fitch Ratings on Tuesday said Indian banks might face a capital shortfall of $50 billion in the event of a systemic crisis in the non-banking financial company (NBFC) sector.

The stress test conducted on the banking entities show that the credit profiles of state banks would come under significant pressure. The weakest, including those with viability ratings in the ‘b’ range, would face heightened solvency risks without capital injections from the government, the agency said.

The sector is already $7 billion short of the capital required to meet a 10 per cent weighted-average common equity tier-1 (CET1) ratio, the level that would give them an adequate buffer above regulatory minimums. The gap would rise to about $50 billion by financial year-end (FYE) 2021 under the stress scenario. Banks would also be $10 billion short of the capital required to meet the regulatory minimum of 8 per cent that is set to apply from end-March 2020.

The stress test conducted on banks examined the potential impact on banks of liquidity pressures in the NBFC sector developing into widespread failures. The rating agency assumed that 30 per cent of banks’ NBFC exposure becomes non-performing. This is as close to a worst-case scenario, but the figure also reflects the proportion of the sector that is characterised by riskier business and financial profiles.

The agency said it also pictured a scenario where 30 per cent of banks' property exposure becomes non-performing, due to tight liquidity and weak sales. The property development sector is particularly reliant on the NBFC financing.

These defaults would reverse recent progress that banks have made in reducing their non-performing loan (NPL) ratios. The banking system’s gross NPL ratio would rise to 11.6 per cent by FYE21 from 9.3 per cent at FYE19, compared with our baseline expectation of a decline to 8.2 per cent. Increased credit costs and a weaker economic environment would result in significant losses over the next two years.