India's economic growth to pickup pace over next two years, says Fitch

The domestic economy is expected to have a more positive growth as the economy gains momentum over the next two years, ratings agency Fitch said on Thursday.

Fitch's statement on the prospects of the domestic economy came up during questions asked by United States investors on the financial health of banking institutions in emerging markets.

"The (Indian) banking system has two main challenges, asset quality and capitalisation, with the largest issues residing with the state-owned banks," the ratings agency said.

According to Fitch, the large privately-owned banks are best positioned to capitalise on the country's recovery with limited asset quality issues and adequate capitalisation together with scale benefits and low to moderate funding costs.

Of the public sector (PSU) banks, Fitch rated State Bank of India (SBI) and Bank of Baroda (BOB) as relatively better positioned to capitalise on the country's improving economic scenario.

"The capital pressures are also substantial. Fitch expects Indian banks to require over $200 billion in capital to be better positioned for growth and to meet the new phased in Basel III capital requirements," Fitch added.

"The state-owned banks will require the bulk 85 per cent of this new capital, as they suffer from lower capitalisation, higher stressed assets and weaker earnings," said the ratings agency.

On the bank asset quality, Fitch said that it expected the system's stressed assets or non-performing and restructured loans to start reducing during 2015, but only gradually as the large stock would take time to resolve.

State-run banks reported high stressed assets of around 12 per cent at the end of March 2014, compared with around four per cent for private banks and ten per cent for the overall banking system.