The rating agency expects improvement in asset quality of Indian banks with pick up in economic growth.
    
"Progress will be led by improvement in the cyclical sectors, which is likely to benefit from a sustained economic recovery," it said.
    
The state-owned banks reported stressed assets of around 12 percent in 2013-14, versus around 4 percent of private banks and 10 percent for the banking system, according to Fitch.
    
The agency said it "expects Indian banks to require over USD 200 billion in capital as growth picks up and banks progress towards Basel III."
    
Fitch said there is emergence of some early signs of stability in asset-quality at certain large state-owned banks.
    
The agency expects the trend to gain strength as economic growth picks up pace with India's real GDP growth projected at 5.5 percent in FY15 and 6.5 percent in FY16, it said.
    
"That is against the backdrop of a new government with a clear electoral mandate and a renewed focus on policy reforms, which is likely to set the stage for a cyclical recovery," it added.

It said Indian banks' capital needs are likely to rise incrementally until the full phase-in of the Basel III regime in the financial year ending March 2019.
    
State-owned banks, which account for around 75 percent of system assets, will require the bulk of this new capital, as they suffer from lower capitalisation, high stressed assets and weak earnings, Fitch said.

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