Indian banks to bolster resilience under RBI's regulatory reforms: Fitch

In its latest analysis titled "Indian Banks to Strengthen Resilience Under Central Bank Reforms", Fitch said the proposed measures would enhance the sector's ability to withstand economic shocks and align domestic regulations more closely with global banking standards.

It says that the 21 reforms announced by the central bank are broadly positive for India's financial sector. An improved regulatory framework will strengthen the banks' operating environment.

The RBI plans to implement a forward-looking expected credit loss (ECL) framework from April 1, 2027, transitioning away from the existing incurred-loss provisioning system and aligning India with international standards. Banks will be allowed to smooth out provisioning adjustments until March 2031.

"There is likely to be a modest hit to profitability from higher credit costs under ECL. Still, Indian banks' VR scores for earnings and profitability are unlikely to be affected, as the banks should be able to absorb them without operating profit/risk-weighted asset (RWA) ratios falling significantly below Fitch's current forecasts," according to Fitch.

It added, "Banks with stronger capital buffers and prudent risk management practices will find the transition easier to manage."

According to Fitch, Indian banks enter this reform phase from a position of relative strength, supported by improved asset quality, steady profitability, and robust capitalisation as of the financial year ending March 2025.

The credit rating agency added that the RBI's broader agenda to enhance risk sensitivity, transparency, and resilience would improve long-term financial stability in the banking system, even if it temporarily compresses short-term earnings for some institutions.

Fitch further observed that while smaller or state-owned banks might face transitional challenges, the reform measures would ultimately fortify the system's capacity to absorb credit losses and manage cyclical risks. (ANI)