Mumbai, November 22: In the absence of meatier capital injections and ongoing currency ban in India, premium credit rating agency, Fitch Ratings Inc, retained its “negative” outlook for India’s banking sector and pointed out fragile financial standing.
Fitch Ratings said that government’s demonetisation move is going to bring mix reactions. It noted that by removing higher-value banknotes from circulation there would be rise in deposits and lenders would eventually be able to decrease lending rates, while lowering costs to service the sector’s debt.
But the premium rating agency also brought to notice a very important point related to demonetisation. The report said that the overall impact on the banking sector would remain uncertain.
By stashing cash, borrowers in sectors would also struggle to service their loans.
The splurge in deposits could eventually fall as people will withdraw again.
As a result India’s banking sector could remain constrained by the “under-capitalisation” of state-owned banks and weak investment demand.
Earlier Fitch had estimated that Indian banks would need about $90 billion in total capital by March 2019 to meet global Basel III banking rules. But now it said that 80 percent of those capital requirements would arise in the next two financial years.
“Clearly the urgent need of the hour is capital.” said a Fitch analyst.
The ratings agency also said it expects bad loans to fall. But bank’s profits would be under pressure as high loan-loss provisions for both new and old NPAs would also remain intact.