The Indian banking sector will require at least $40 billion to $55 billion additional capital to meet the Basel III requirements by 2019 of which the state-run banks will require the bulk, global ratings agency Fitch said in a report.

Basel III norms are an internationally agreed set of measures developed by the Basel committee on banking supervision in response to the financial crisis of 2007-09. It lays down the minimum requirements for internationally active banks, and the standard is likely to be adopted globally next year, including in India.

The banks’ capital, including the money given by the government last year, has been eroded by “mounting bad debt and poor financial performance”, the agency said.

Moreover, it added, non-performing loan percentages could continue to climb due to new challenges, including the stress in small and medium enterprises.

The sector is most likely to remain negative until the banks address the mounting bad debt and poor financial performances, Fitch said.

The report observed that most of the capital, which the country infuses, is likely to be used for meeting the minimum capital requirements and absorbing the non-performing loan (NPL) provisions.

"The state is likely to be forced into providing most of the required capital, since capital raisings remain challenging due to state banks' weak equity valuations," the report said.The gross bad loans for the country stood at Rs 10.25 lakh crore as on March 31, 2018. In the March quarter of FY18, the pile grew by Rs 1.39 lakh crore from the previous stated Rs 8.86 lakh crore as on December 31, 2017. For the last fiscal, the total bad loans of these banks rose by a whopping Rs 3.13 lakh crore.

The global rating agency said the capital position of the state-run banks is at the most risk. Out of 21, 11 of them are below the required eight percent.

The banks' credit costs have sharply risen after implementing the regulatory changes which aimed at accelerating the bad-loan recognition process. The implementation led to losses that eroded nearly all of the $13 billion in government capital injected in the last financial year in addition to the already-weak capital positions, the report said.

The financial health of the major private banks have weakened in the last fiscal but remain in a better condition than that of the state-owned banks, the report said.

Even though the problems in the sector have been recognised, the report said that the NPL ratio can rise due to the residual stress and the new risks that are emerging out of the retail and SME sectors.