“The sector NPL ratio rose to 12.1 from 9.3 per cent, and exceeded our previous forecast of 11.5 per cent. The state banks’ average NPL ratio was 14.5 per cent. IDBI Bank, UCO Bank and Indian Overseas Bank’s ratios were over 25 per cent,” said Fitch.
Six state-owned banks reported common equity Tier 1 (CET1) ratios that did not meet the regulatory levels, including Punjab National Bank, the second-largest state bank. Banks will have to meet a higher minimum regulatory CET1 requirement of 8 per cent in 2018-19, including the capital conservation buffer.
While the government’s additional infusion of $11 billion for recapitalisation in 2018-19 will help banks avoid breaching regulatory triggers, more government capital is required to stabilise banks’ balance sheets, meet regulatory requirements and support growth.
Fitch said it was possible that more state banks will be placed in the Reserve Bank of India's prompt corrective action (PCA) framework.
Fitch said the sector was moving close to full recognition of legacy bad loans and there was an improvement in provision coverage ratios. The speedier recovery from the National Company Law Tribunal accounts can release some capital, if recoveries prove higher than current provisions, as was the case in some recent resolutions. Funding for state banks has remained stable. However, the extended period of poor performance is putting stress on state banks' standalone profiles, it added.