Global credit rating agency Fitch Ratings on Tuesday said an inability to infuse fresh capital into government owned banks would impact their balance sheet stability.
In a statement, Fitch Ratings said the credit profiles of government-owned banks are under pressure as heavy losses reported in the last two consecutive quarters weaken their core capital adequacy.
"An inability to strengthen capital in a timely manner could have a potentially negative impact on the banks' ability to achieve balance-sheet stability, pursue credit growth and defend market share in the long term," it said.
According to the rating agency, the government remains the most important source of new capital for the public sector banks as their access to capital markets is likely to reamin weak.
"There are few options for private-sector capital for now. Public sector banks' access to capital markets is likely to remain weak. There is little additional Tier 1 capital issuance either (around $500 million since January).
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"The sector's requirement for new capital needs to be addressed to meaningfully kick-start credit growth to lend support to the economy," it said.
According to Fitch Ratings, the core capital ratios for many public-sector banks are close to or below the Basel III financial year 2019 (FY19) minimum regulatory requirement of eight per cent.
The public sector banks are unlikely to build capital through internal capital generation in light of the dim earnings outlook - at least over the next two years due to the ongoing provisioning pressure.
Fitch Ratings said the central bank's review of asset quality highlights the higher capital risks for government banks with an average net non-performing loans (NPL) to equity ratio at around 70 per cent versus eight per cent at private banks.
The Reserve Bank of India's recent discussion paper on limiting banking sector exposure to individual corporate borrowers, when implemented, could further reduce systemic risk by limiting concentration risk to large corporate, it said.
--IANS
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