Will Indian banks crack the code of its capital conundrum?

They’re struggling to produce quality loans.

It’s almost paradoxical how the country’s banks, despite India being the fastest-growing large emerging market, still continues to face bleak challenges.

According to analysts from Fitch Ratings, the main issues for India’s public-sector banks are asset quality and capital. It adds that while private-sector banks are relatively better positioned, loan growth is still sluggish, as quality lending becomes rare.

“Fitch expects the Indian banks’ stressed-assets ratio to improve only gradually from the recent high point of around 11%. These legacy issues are likely to hamper the’ ability to internally generate capital at a time when Fitch estimates that the banks would require around USD140bn in total capital to ensure full Basel III implementation by FY19,” Fitch Ratings said.

Meanwhile, the government has been assisting banks with some capital, but expects the banks to fish on the market for the remainder.

“However, the challenge arises from market depth and appetite being constraining factors in raising the required amount. Consolidation within the state banks has been a long-debated topic, although government’s references to consolidation in August 2015 as part of the broader seven-point reform plan is important, and could prompt state banks to consider the consolidation option on a more serious note,” Fitch Ratings said.

As the huge capital requirement grips Indian banks, Fitch said the challenges could potentially be a catalyst for consolidation.