Ratings agency Fitch on Thursday said that it expected India to have a more positive growth story, as the economy gains momentum over the next two years.
Fitch's statement on the prospects of the India economy came up during questions asked by the US 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," Fitch said.
According to the ratings agency, the large privately-owned banks are best positioned to capitalise on India's recovery with limited asset quality issues and adequate capitalisation together with scale benefits and low to moderate funding costs.
Of the state-owned banks, Fitch rated State Bank of India (SBI) and Bank of Baroda (BOB) as relatively better positioned to capitalise on India's improving economic scenario.
On the bank asset quality, Fitch said it expects the system's stressed assets or non-performing and restructured loans to start reducing during 2015, but only gradually as the large stock will take time to resolve.
State-owned banks reported high stressed assets of around 12% at end March 2014, compared with around 4% for private banks and 10% for the overall financial system.
"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," the ratings agency added.
"The state-owned banks will require the bulk 85 percent of this new capital, as they suffer from lower capitalisation, higher stressed assets and weaker earnings."
