Indian banks may need up to 1 trillion rupees ($15.7 billion) to manage the risks from their exposure to debt-stressed companies, Fitch's Indian unit said, on top of the tens of billions of dollars in capital they need to comply with global banking rules. State-run lenders, who dominate India's banking sector with more than 70 percent market share, will need 930 billion rupees to deal with stressed loans, India Ratings and Research said in research published recently.
That may "significantly increase" the Indian government's equity injection requirements in the state-owned banks, it said. "We expect private sector banks and large (state-run banks) to be better placed in handling potential credit cost hikes from these large stressed corporates, given their sufficient operating and capital buffers," India Ratings analysts wrote in a note.
It added that mid-sized state-run lenders will be the most affected, with their thin margins and weak capitalisation. Most state-run lenders have high levels of bad loans and their shares are trading below their book values, limiting their ability to attract capital from the market. The Indian government has traditionally injected capital in the state-run lenders.
The government last week outlined a plan to infuse 700 billion rupees in the banks over four years to help them meet the Basel III banking rules. It estimated the banks need a total 1.8 trillion rupees through March 2019 for meeting Basel III. The government expects its reform measures and the banks' crackdown on bad loans will help improve their valuations, enabling them to raise the remaining 1.1 trillion rupees from the market.