With many public sector banks' profitability taking a big hit, their credit profile will come under pressure unless they are adequately capitalised, said Fitch Ratings.
It said its estimated capital requirement of $140 billion for the system may have to be reassessed, given the losses.
Fitch has long assessed India's banking system on a stressed-asset basis rather than NPLs (non-performing loans) and factored in under-provisioning for ratings of public sector banks.
The sudden deterioration in profitability at PSBs for the third quarter of 2015-16 was triggered mainly by higher provisioning following an RBI order on reclassification of troubled loans.
RBI, in an attempt to help banks clean up their balance-sheets, has nudged them to identify stressed accounts and significantly raise provisioning over the two quarters to 2015-16.
It is "unusual" for RBI to be driving state-owned banks to raise provisioning so quickly, which indicates that earnings pressure will continue in the fourth quarter of this fiscal and possibly beyond, Fitch added.
Fitch is of the view that RBI's intention to clean up bank books by March 2017 as a pre-requisite to kick-start credit growth could help revive investor confidence in PSBs. "But the suddenness and speed of the provisioning in the second half of FY16 highlights how long it has taken to address poor balance-sheets. It also raises questions over the pace and implementation of bank recapitalisation and reforms, especially when central bank intervention is required in identification of bad assets," it added.
Fitch has long highlighted that provisioning at PSBs is weak and significant new capital is necessary to maintain credit profiles.
However, the effect on earnings and credit profiles would have been less dramatic had the provisioning process been spread out over a longer period, it added.