Economic slowdown to affect Indian banks' capital ratios: Fitch

09 February 2009

The capital ratios of Indian banks' may be barely adequate in the backdrop of current downturn in the credit cycle as well as the diminished options for raising capital in 2009, said ratings agency Fitch in its report Indian Banks - Annual Review and Outlook.

Their  Tier 1 capital may be eroded if loan growth remains higher than the internal capital generation for banks (which is likely, given that internal capital generation has been between 10 per cent and 15 per cent for most banks and may fall as profitability comes under pressure), Fitch noted.

This could in turn reduce the banks' financial flexibility to meet the challenges of the credit downturn at least over the next few years, the rating agency added.

However, Fitch noted that till now banks have been able to maintain capital ratios at the aggregate in spite of rapid loan expansion, and increased capital charges under Basel II. This has been due to the timely infusion of common equity by the larger private and government banks in FY08.

The aggregate Tier 1 ratio for the banking system was therefore still at 8.5 per cent at end of September 2008, comprising almost entirely of common equity (over 95 per cent of the total Tier 1 capital).

According to Fitch, the options for raising capital are currently limited to raising hybrids from the domestic market, which should provide headroom to meet the normal capital needs in 2009.