Fitch Ratings on Thursday said private sector banks, with stronger loss-absorption buffers, are likely to gain market share from their state-owned peers in the medium term.
Private banks' loss-absorption buffers, in particular enhanced capital bases, strengthen their ability to recognise losses up-front with less disruption in their efforts to accelerate market-share gains, Fitch said.
However, it does not expect immediate gains as the sector's credit growth is likely to remain subdued, and will only resume meaningfully once a sustained recovery from the pandemic gets underway
"Indian private banks, which have stronger loss-absorption buffers than the public sector banks, are likely to gain market share from their state-owned peers in the medium term," Fitch Ratings said.
Indian private banks have had a decade of strong growth, backed by better capitalisation and fewer asset quality problems.
It said private banks increased their market shares by 14.4 pp (percentage points) and 18.5 pp by assets and loans, respectively, at the expense of state-owned counterparts during this time.
Most of the gains occurred in the five years preceding the coronavirus pandemic as state banks were hamstrung by ballooning impaired loans, larger losses and weaker capitalisation.
Fitch said the government-led merger of state-owned banks helped them to consolidate their market positions in the last few years, but the state-owned banks' market shares will continue to erode if they do not raise adequate capital to absorb future stress and support growth.
It said some Indian banks have raised capital after the Reserve Bank of India implored them to raise fresh equity. However, the capital raising has been limited thus far to private banks, which collectively raised USD 6.3 billion in the past three months.
"While state banks have announced their intentions to raise fresh equity, they have not gone further than routine board approvals nor given clear indications on the timelines, except for a few banks.
"This is despite the need to expedite improvement in the state banks' capital positions, which we believe remain vulnerable to varying degrees to future stress and unexpected losses," Fitch said.