Chennai

The operating environment (OE) for Indian banks has strengthened as economic risks associated with the Covid-19 pandemic have ebbed, Fitch Ratings said in a report on Wednesday.

Fitch also said other structural issues like lengthy legal process, ‘bad bank’ not playing a meaningful role hamper the OE.

While the number of prudential indicators for the sector have also improved compared with pre-pandemic levels, though growing risk appetite in a relatively benign OE highlights the importance of appropriate buffers against potential stress, the credit rating agency added.

Fitch revised its OE mid-point score for Indian banks to ‘bb’ from ‘bb+’ in March 2020, after assessing that the pandemic was likely to worsen the existing OE stresses facing the sector.

According to Fitch, India was badly affected by the pandemic, but the associated risks have now receded.

Fitch affirmed the sovereign’s rating at ‘BBB-/Stable’ in May and we currently forecast real GDP growth to average 6.4 per cent annually in the three years to March 2026 (FY23-FY25), putting India among the fastest-growing sovereigns in our rated portfolio, the report said.

The easing of pandemic-related risks has been accompanied by a strengthening of capital buffers. The sector’s average common equity Tier 1 (CET1) capital ratio rose to 13.4 per cent by FYE23, from 10.4 per cent in FYE18.

This partly reflects around $50 billion in cumulative fresh equity provided by the sovereign to state banks since 2015, Fitch Ratings said.

Earnings buffers also appear significant, with operating profits equivalent to around 2.8 per cent of risk-weighted assets by our estimate in FY23, up from 0.6 per cent in FY20.