OREANDA-NEWS. December 14, 2015. Indian banks' credit growth is likely to be moderately higher in financial year 2016 (FY16, to March 2016), but any sharp recovery in credit fundamentals appears unlikely with capital and asset quality-related challenges acting as impediments to growth. The recovering GDP growth outlook is a positive and should bode well for the sector, and large private banks are distinctly better placed in leveraging a rebounding economy, says Fitch Ratings in a new report published today.

The government's expected capital injection of around USD11bn into its banks is critical; but may be insufficient to support sustainable lending growth, to achieve Basel III requirements, and cushion against balance-sheet stress - all at the same time. State-owned banks - which carry a disproportionate share of the stressed assets - have little choice but to look at strengthening balance sheets if they to revive profitability, internal capital generation and equity valuations in any meaningful way. Fitch estimates that the banks would require around USD140bn in total capital to ensure full Basel III implementation by FY19.

Indian banks' stressed assets ratio should improve marginally in FY16 from 11.1% in FY15, although there is still some time before a reversal in absolute NPLs. New NPL growth has started to slow down across many banks, but resolution of the existing large stock will be a slow and protracted process - as structural challenges in stressed sectors still persist while corporate leverage remains high. Therefore, credit costs are likely to remain high and will continue to be an overhang on earnings growth for a longer period - unless macroeconomic recovery and speedier reforms aid faster asset resolution or banks conduct greater capital-raising to push growth, or both.

The large private banks are distinctly superior to their state-owned counterparts due to stronger capitalisation, high internal capital generation and robust pre-provision profitability. In Fitch's view, the above strengths should be able to hold them through their recent asset-quality issues but also make them well-poised for growth when the need arises.