Mumbai, Sep 3 India's private lenders, which have stronger loss-absorption buffers than public sector banks, are likely to gain market share from their state-owned peers in the medium term, Fitch Ratings said on Thursday.
According to the ratings agency, private banks' loss absorption buffers, in particular enhanced capital bases, strengthen their ability to recognise losses upfront with less disruption in their efforts to accelerate marketshare gains.
"However, we do not expect immediate gains as the sector's credit growth is likely to remain subdued, and will only resume meaningfully once a sustained recovery from the pandemic gets underway," the ratings agency said in a statement.
"Indian private banks have had a decade of strong growth, reflected in much higher loan CAGR of 19.6 per cent compared with state banks' 8.5 per cent, backed by better capitalisation and fewer asset quality problems. Private banks increased their market share by 14.4 pp and 18.5 pp by assets and loans, respectively, at the expense of state-owned counterparts during this time."
According to the statement, most of the gains occurred in the five years preceding the coronavirus pandemic as state banks were hamstrung by ballooning impaired loans, larger losses and weaker capitalisation.
"Nonetheless, private banks' risk appetite in some sectors has been significant during this time, which has contributed to the downward trajectory in their Viability Ratings (VRs) in the last two years," the ratings agency said.
"Their larger risk appetites in certain segments render their intrinsic credit profiles more vulnerable to deterioration in the operating environment, such as what we see now."
As per the statement, government-led merger of state-owned banks helped them to consolidate their market positions in the last few years, but the state-owned banks' market shares will continue to erode if they do not raise adequate capital to absorb future stress and support growth.
"Some Indian banks have raised capital after the Reserve Bank of India implored banks to raise fresh equity. However, the capital-raising has been limited thus far to private banks, which collectively raised $6.3 billion in the past three months," the statement said.
"While state banks have announced their intentions to raise fresh equity, they have not gone further than routine board approvals nor given clear indications on the timelines, except for a few banks. This is despite the need to expedite improvement in the state banks' capital positions, which we believe remain vulnerable to varying degrees to future stress and unexpected losses."
Besides, it said that state banks' capital positions weakened during the quarter ended June 2020 (1QFY21) mainly due to the adverse impact of $4.4 billion from mergers on the acquiring of state banks, which eroded common equity tier 1 (CET1) ratios by an average of around 170 bp. At the same time, private banks added 165-220 bp to their CET1 ratios, which averaged at 14.8 per cent at FYE20.
"As a result, the gap between private banks' and state banks' CET1 ratios widened to 637 bp from 474 bp at end-December 2020," the statement said.
"Without adequate capital, state banks may be forced to curtail growth because their financial statements do not yet fully reflect the impact of the pandemic on asset quality due to regulatory relief measures that have delayed non-performing loan (NPL) recognition."
( With inputs from IANS )
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