India Ratings and Research has revised its outlook on the banking sector to 'negative' from 'stable' for 2HFY21.

The ratings agency Ind-Ra said this revision was done in view of an expected spike in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects.

Even the capital buffers for most public sector banks (PSBs) remain modest, it said.

As per Ind-Ra's bear case, the spike in stressed assets due to the pandemic is expected to double the credit costs for banking system than estimated pre-Covid-19 levels for FY21.

Consequently, Ind-Ra revised the rating outlook on PSBs to 'negative' for 2HFY21.

"PSBs' modest capital buffers are expected to deplete further in FY21, due to provisioning requirements. Also, pre-Covid profitability expectations for FY21 would be belied and most banks are likely to report net losses," the agency said in a statement.

"They may also need to continue to build-up their provision cover in FY22 for restructured assets as some of the restructured assets could turn NPA in FY23. PSBs' could require Rs 350 billion-550 billion in 2HFY 21 for Tier-1 ratio of 10 per cent. Covid-19 or contingent provisions are much lower than that for private banks."

According to the statement, Ind-Ra has maintained a 'stable' outlook for private banks, as they are better placed to withstand the challenges presented by the pandemic.

"Most large banks have strengthened their capital buffers, built contingent provisions, and have been proactive in managing the loan portfolio. While the system's credit growth could remain anaemic, and short-term financial performance could deteriorate modestly, large banks may benefit from credit migration," the statement said.

"As opportunities arise, these banks are in a position to gain substantial franchise growth in the medium term, given that they have also added to their capital buffers over the past few months."

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