State-owned lenders saw a significant improvement in the capital adequacy ratio in the fiscal first quarter, outpacing private sector banks, driven by fresh equity issuances aimed at meeting minimum public shareholding norms, along with the issuance of additional tier-I (AT1) and II bonds, analysts have said.
Private sector banks used their capital buffers to fuel balance sheet expansion, leading to modest growth in capital to risk-weighted assets ratios (CRAR) in Q1.
The CRAR of state-owned banks rose by 2–3 percent year-on-year in the JUne quarter, while private banks posted a moderate increase of 0.20–1.37 percent . The CRAR of PSU banks was in the range of 16-25 percent compared to 15-23 percent for private lenders.
According to Securities and Exchange Board of India's minimum public shareholding norms, banks have to bring down promoter shareholding to 75 percent and maintain a minimum public holding of 25 percent.
“Some public sector banks were below the SEBI threshold for public shareholding and have issued fresh equity to comply,” said Sanjay Agarwal, senior director at CareEdge Ratings. “These efforts, combined with bond issuances, have helped shore up their capital adequacy.”
While PSBs have shown stronger year-on-year improvement, private sector banks typically maintain higher capital adequacy and lower gearing overall. “The capital adequacy ratio of private sector banks is generally higher than that of public sector banks, and the CAR of most banks in India remains comfortably above regulatory requirements,” Agarwal said.
Sachin Sachdeva, vice president and sector head–financial sector ratings at ICRA, said capital ratios in PSBs typically face pressure in the first quarter due to the exclusion of quarterly profits and higher operational risk-weighted assets (RWA). However, Q1 FY26 marked a departure, supported by subdued credit offtake, lower risk weights on loans to non-banking financial companies (NBFCs), and fresh capital infusion.
“Despite the seasonal increase in operational RWAs, several PSBs reported sequential improvement in capitalisation metrics,” Sachdeva said. “Slower credit growth, regulatory concessions on NBFC exposures, and equity raising by select banks contributed to this outcome.”
On the private bank front, analysts said that these entities have taken a different route, opting to deploy excess capital towards credit expansion rather than significantly boosting capital ratios.
“Private banks have used their capital buffers to support balance sheet growth, which has marginally tempered their CRAR expansion,” Agarwal said.
Analysts expect capital buffers to remain strong across the sector. ICRA projects a 40–50 basis point increase in Tier-I capital ratios for PSBs in the current financial year.
“Internal accrual generation is expected to remain healthy. Alongside planned equity issuances, this should adequately support the anticipated pickup in credit growth in the second half of FY26,” Sachdeva said.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
