The rating agency has called for more fund infusion into the state-run banks. The government has earmarked Rs 70,000 crore for capital infusion into state-run banks over next few years. But "persistent losses and capital erosion through the last five quarters emphasise the need for more capital to allow banks to address their ongoing capital needs to meet required provisioning and to support balance sheet growth," Fitch said.
The situation is particularly critical for mid-sized state banks that have seen the sharpest deteriorations in their financial profiles in the last few years, the ratings agency added.
According to Fitch, persistent losses and weak internal capital generation have put some banks at risk of additional tier-1 or AT1 coupon deferrals due to a lack of adequate distributable reserves. State-owned banks have the most pressing problems with their distributable reserves on a clear negative trend over the last couple of years, Fitch said.
Many public sector banks have raised capital through AT1 bonds or additional tier 1 bonds, which typically have no maturity date. Banks continue to pay interest forever until they repay the principal after a specified period.
"Indian Overseas Bank was the worst affected, with 9M17(April-December) losses equivalent to 132 per cent of its financial-year 2016 distributable reserves. Losses exceeded 30 per cent of distributable reserve at four other state-owned banks - Bank of Maharashtra, IDBI Bank, UCO Bank and Central Bank of India," Fitch said.
The RBI's recent decision to allow banks to make additional Tier 1 (AT1) coupon payments from statutory reserves may have helped mitigate short-term coupon-deferral risks, but state banks' reserves are likely to continue falling, Fitch said.
The RBI has made several regulatory adjustments in the last few years to avoid potential damage to sentiment in the domestic market for capital instruments, Fitch said.
Fitch said Indian banks need around $90 billion fresh capital by 2019 to meet Basel III standards and government owned banks account for around 80 per cent of that. Basel III is a comprehensive set of global reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. (With agency inputs)