Report said credit growth is likely to recover gradually, but a sharp uptick is ruled out until balance sheets are cleaned up.

Mumbai: Rating agency Fitch on Thursday hinted at revising its outlook on domestic banks to stable from negative next year provided the government front-loads a substantial part of the Rs 2.11 trillion recapitalisation.

The agency said has had a negative sector outlook on the country's banks for many years. It said if the last month's announcement to inject USD 32 billion of fresh capital into the state-run banks over the next two years is well executed, it will be significantly credit positive.

In October, the government had announced a Rs 2.11 trillion capital infusion for public sector banks over the next two years. Of this, Rs 1.35 trillion will be through the recapitalisation bonds, while remaining Rs 76,000 crore from the budgetary support.

"If the government front-loads a substantial part of the capital injection, as is generally expected, we may revise the sector outlook to stable in 2018, provided there is greater clarity on operational details and timelines associated with the recapitalisation exercise," it said.

The report said the substantial government contribution which is to be injected directly by the state is a departure from past practices, and should go a long way in plugging the capital gap amid expectations of more haircuts and subdued earnings.

The capital injection will stem the downward pressure on the banks' viability rating, which have seen several downgrades over the last three- four years, and improve their ability to raise capital on their own, which had been limited so far due to poor health and weak valuations.

The agency said a protracted downturn, slow resolution of NPL stocks and a sharp slowdown in credit growth has pushed the asset-quality cycle longer than envisaged.

It expects more volatility in the NPL ratio (FY18 estimated at 11.5 per cent; FY17 at 9.7 per cent) in the near-term, given the stress in the power sector, concerns around farm loan waivers and SMEs, as well as heightened central bank activity aimed at minimising NPL divergences across banks.

"However, recapitalisation coupled with resolution of some large NPL accounts could mean that asset-quality parameters may eventually witness some stability after FY18," the report said.

The report said credit growth is likely to recover gradually, but a sharp uptick is ruled out until balance sheets are cleaned up.