'Challenges for PSU banks remain despite uptick in economy'

Fitch Ratings' said challenges for state-owned banks remain despite improving macro picture.

"The performance of India's state bank sector remained challenged in FY15 (to end-March 2015), with continued pressure on asset quality and weak capital," according to Fitch Ratings' Indian Banks Report Card FY15.

Capital needs are likely to increase substantially each year up until FY19, it said adding there were few indications of a meaningful recovery in earnings in the short-term, though stressed assets are likely to have peaked and NPL (non-performing loan) accretion is easing.

"A difficult year for Indian banks in FY15 was characterised by weak credit demand despite a gradually improving macro picture. State banks in particular continued to face asset-quality pressures, falling profitability and weakened capitalisation on an adjusted basis," it said.

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 per cent 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%.

"Nonetheless, the outlook for FY16 is more positive for Indian bank credit. The system-wide stressed-assets ratio is likely to begin falling against the backdrop of a more favourable economic environment.

"Gross NPL accretion has already shown signs of deceleration, and we forecast GDP growth to gain momentum and rise to 7.8%," Fitch said.