$50b capital shortage may hit Indian banks in case of NBFC stress: report

State banks would be hit harder.

Indian banks would face a capital shortfall of about $50b in the event of a systemic criss in the struggling non-bank financial company (NBFC) sector, according to Fitch Ratings.

Under a stress test that assumes a third of banks' NBFC and property exposure becomes non-performing, the credit profiles of the state banks are expected to come under significant pressure. The weakest players are expected to face heightened solvency risks without capital injections from the government.

In such an event, systemwide gross NPL ratio may rise to 11.6% by FY2021 from 9.3% at FY2019. Increased credit costs and a weaker economic environment would also result in significant losses over the next two years.

State banks are expected to be the most affected as losses would add to existing capitalisation pressures. The NBFC sector is already $7b short of the capital required to meet a 10% weighted-average common equity Tier 1 (CET1) ratio. 

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Meanwhile, banks would also be $10b short of the capital required to meet the regulatory minimum of 8% that is set to apply from end-March 2020.

“The shortfall at state banks would be larger, as we expect private banks to remain generally above the minimum. Aside from the weaker state-owned banks facing heightened solvency risks in the absence of additional fresh equity, those in the 'bb' category could breach the minimum regulatory additional Tier 1 (AT1) threshold of 5.5% CET1, triggering compulsory AT1 write-downs,” Guha added.