Credit rating agency Fitch Ratings on Thursday said huge capital needs could be the trigger point for consolidation amongst government-owned banks in India but only if there is a political will in its support.
In a report on the Indian banking sector, it said legacy issues are to hamper the ability of the banks to internally generate capital which it estimates in the region of $140 billion to comply with the Basel III norms.
"Consolidation within the state banks has been a long-debated topic, although government's references to consolidation in August 2015 as part of the broader seven-point reform plan is important, and could prompt state banks to consider the consolidation option on a more serious note," Fitch Ratings said.
"Fitch believes that the huge capital requirement facing Indian banks, and the ensuing challenges, could potentially act as a trigger for consolidation, but only if there is a strong political will supporting it - and which is ultimately the biggest impediment," the report said.
Expressing surprise at Reserve Bank of India's (RBI) move to designate State Bank of India (SBI) and ICICI Bank Ltd as Domestic Systemically Important Banks, the credit rating agency said expects more banks to be designated so reflecting the challenges involved in meeting the capital needs of Indian banks.
On the stressed assets of banks, Fitch Ratings said it expects the banks to show a gradual improvement in the stressed assets ratio, and that it may take some time for the bank's non-performing assets (NPA) to witness a turnaround.
The credit rating agency said loan-loss provision cover has deteriorated steadily since financial year 2011-12, due mainly to state-owned banks where the growth of stressed assets has sharply outpaced provisioning for this end.