With the profitability of Indian public sector banks (PSBs) severely dented as seen from recent third-quarter results, their credit profile will come under pressure unless they are adequately capitalised, Fitch Ratings said on Friday.
"Fitch's estimated capital need for the system of $140 billion may need to be reassessed, given some of the losses," the US agency said in a research note.
"The stand-alone credit profile of many Indian public sector banks should come under pressure unless there is meaningful action to restore capital adequacy," it said.
Significant quarterly losses reported at several large public banks last week, including Bank of Baroda and Bank of India, underscored long-standing balance-sheet and capital risks stemming from legacy issues pertaining to poor asset quality and weak provisioning," Fitch added.
The ratings firm said the sudden drop in profitability of PSBs for the third quarter of the current fiscal was triggered mainly by higher provisioning following a Reserve Bank of India (RBI) order on reclassification of distressed loans.
The RBI, in line with its target for banks to clean up their balance-sheets by March 2017, has nudged both public and private banks to identify stressed accounts and significantly raise provisioning over two quarters through to the end of the current fiscal.
Fitch said that RBI's intent to clean up bank balance sheets by next year could help revive investor confidence in PSBs.
"But the suddenness and speed of the provisioning in the second half of FY16 highlights how long it has taken to address poor balance-sheets," it said.
It also raises questions over the pace and implementation of bank recapitalisation and reforms, especially when central bank intervention is required in identification of bad assets," it added.
The trend of state-run banks declaring low profits or losses and the ever-ballooning provisioning for non-performing assets (NPAs) has continued through the past year.
The banking index of Bombay Stock Exchange (BSE) has taken a 67 percent hit. In the case of Punjab National Bank, for example, the stock is down 58 percent, while for State Bank, it is down 52 percent.
Reacting to the bank stocks' decline last week, RBI Governor Raghuram Rajan said: "The decline in bank share prices caused investors to panic. Bank share prices are being hit by the global markets turmoil.
"We're looking at banks having clean and fully provisioned balance sheets by March 2017. Banks are using tools devised to clean up their balance sheets."
"Change in attitude in the banking system takes time as banks try to unlock the value of their NPAs. But the end-game is in sight. We don't envisage a further set of AQRs (asset quality review) and new loans that require to be dealt with," he added.
"Such reporting of losses by the Indian banks is unprecedented. The trend is clear -- unfortunate that several public sector banks are posting negative results and wiping out the equity," said Saswata Guha, director of financial institutions at Fitch Ratings.
The earnings outlook is also more daunting and the pain may continue during the next year," she added.
Guha expects the Indian banking sector to close this fiscal with a NPA of around a whopping Rs.4 trillion and total stressed assets of around Rs.9 trillion.
According to the finance ministry, the NPA ratio of banks -- net exposure versus bad loans -- rose from 3.42 percent as on March 2013 to 4.62 percent as on the same month of last year.
In absolute terms, the ministry pegs it at Rs.1,83,854 crore versus Rs.3,09,409 crore.
