MUMBAI: Bad loans will add up to almost half of the equity capital of public sector banks if even a fifth of the loans they have recently restructured continue to default according to a report by Fitch Ratings. According to the agency mid-sized public sector banks remain the weakest and lenders might have to seek funds overseas as there is no domestic market for hybrid capital.

“Capital needs are likely to increase substantially each year up until FY19. There are few indications of a meaningful recovery in earnings in the short term, though stressed assets are likely to have peaked and NPL accretion is easing,” Fitch Ratings said.

Describing FY15 as a ‘difficult year’ Fitch said that state-owned banks continued to face asset-quality pressures, falling profitability and weakened capitalisation. “”System-wide loan growth, at 9.7%, was the lowest over the past decade, and concentrated mainly in retail and farm credit. The system NPL ratio rose to 4.6% of total assets from 4.1% in FY14, though the bulk of the deterioration was accounted for by restructured loans, as expected. Consequently, the broader stressed-assets ratio (which includes performing restructured loans) spiked to 11.1%, from 10%,” the report said.