In a comment issued in Mumbai on Tuesday, the rating agency looked at issues ranging from its estimate of the non-performing assets (NPAs) in the banking system, the recapitalisation bill that the Government will have to bear and the privatisation and consolidation in the local banking sector.

"Recapitalisation cost for government banks and financial institutions are estimated at between $5.9 billion and $10.3 billion, which is under 3 per cent of India's GDP," the rating agency said.

"The loans to GDP ratio for the fincnaial system was 39 per cent, compared with over 100 per cent for many Asian countries that suffered banking crises recently. Indian banks had scarcely financed any real estate or share-collaterised lending.

In addition, due to large statutory liquidity requirements, loans were only 42 per cent of the total assets for commercial banks. Consequently, net NPAs to total assets are at a manageable 8.5 per cent," the international rating agency said.

The rating agency has attributed a large share of banks' poor asset quality to the debtor-friendly foreclosure and bankruptcy laws, which `allow debtors to default with impunity'. The agency also classified all Indian banks into healthy, not-so-healthy and weak categories and expressed its view that the closure of weak banks should further strengthen the banking system.

"However, the political reality makes radical restructuring unlikely, and the banking sector weakness will continue to constrain both the banks' and the sovereign's credit ratings," it said.

"Privatisation of the government banks is inevitable, especially in the next two years. Banking system consolidation will require some enabling provisions such as flexibility to cut jobs, closure of unprofitable branches and establishing a asset reconstruction company to make mergers meaningful.

"Government banks will need to make huge investments in technology and devise their business strategies so as to exploit such developments," the international rating agency said.

Fitch IBCA expects a change in the RBI's role from an `ownership' function to a purely supervisory one. Further, RBI is likely to keep tightening prudential rgulations gradually in line with international best practices.