The government’s expected capital injection of around $11 billion (about ₹70,000 crore) into its banks is critical but may be insufficient to support sustainable lending growth, achieve Basel III norms and cushion balance sheet stress — all at the same time, according to Fitch Ratings.

Reviving profitability State-owned banks — which carry a disproportionate share of the stressed assets — have little choice but to look at strengthening their balance sheets if they have to revive profitability, rev up internal capital generation and equity valuations in any meaningful way, the credit rating agency said in a report published on Thursday.

Fitch estimates that the banks would require around $140 billion (about ₹8.90 lakh crore) in total capital to ensure full Basel III implementation by FY19.

Compared to the State-run banks, large private banks are distinctly superior, thanks to stronger capitalisation, higher internal capital generation and robust pre-provision profitability.

In Fitch’s view, these strengths will not only see large private banks through their recent asset-quality issues but also keep them well positioned for growth when the opportunity arises.Indian banks’ stressed assets ratio should improve marginally in FY16 from 11.1 per cent in FY15, although there is still some time before a reversal in absolute non-performing assets (NPAs) happens.

Fitch Ratings further said that new NPA growth has started to slow down across many banks, but resolution of the existing large stock will be a slow and protracted process — as structural challenges in stressed sectors still persist even as corporate leverage remains high.

Therefore, credit costs are likely to remain high and will continue to be an overhang on earnings growth for a longer period — unless macroeconomic recovery and speedier reforms aid faster asset resolution or banks conduct greater capital-raising exercises to push growth, or both.

GDP growth, a positive Indian banks’ credit growth is likely to be moderately higher in the financial year ending March 31, 2016, but capital and asset quality challenges will limit sharp growth recovery, said Fitch.

“The recovering GDP growth outlook is a positive and should bode well for the sector, and large private banks are distinctly better placed in leveraging a rebounding economy,” the agency said.

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