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The banking system has two main challenges — asset quality and capitalisation — with the largest issues residing with state-owned banks, according to Fitch Ratings.
The large privately-owned banks are best-positioned to capitalise on India’s recovery with limited asset quality issues and adequate capitalisation together with scale benefits and low/moderate funding costs.
“Of the state-owned banks, State Bank of India and Bank of Baroda appear relatively better positioned,” said the credit rating agency in its report “What Investors Want to Know: EM Banks.”
On asset quality, Fitch expects system-stressed assets (defined as non-performing and restructured loans) to start reducing during 2015, but only gradually, as the large stock will take time to resolve.
State-owned banks reported high stressed assets of around 12 per cent at end-2013-14, compared with around 4 per cent for private banks and 10 per cent for the system. Fitch said it expects Indian banks to require over $200 billion in capital to be better positioned for growth and to meet the new phase in Basel-III capital requirements.
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