Global rating agency Fitch on Friday said that public sector banks will have to mobilise as much as USD 40 billion in additional equity capital over and above their retained earnings to meet the Basel III capital norms.
Of the USD 50-billion additional capital that domestic banks need by 2018 to meet the Basel III, USD 40 billion will have to be mopped up by the state-run lenders, it said.
"Of the USD 40 billion that the government banks need, about half is likely to be injected by the government based on its stated intent of maintaining majority shareholding. Government support has received a boost since 2008 and it has budgeted for an equity injection of USD 2.5 billion this fiscal. The requirement will, however, accelerate in FY16 and needs to be planned," the agency's report said.
The remaining equity of upto USD 20 billion needs to be raised from markets and it represents a significant addition for banks. To put this in perspective, banks raised only about USD 2.5 billion of common equity from the markets in FY11 and FY12.
Unless planned, government banks may face the risk of a sudden shortfall in capital during FY16, requiring additional support by the sovereign and putting further pressure on government finances. It further noted that most of the requirement of USD 50 billion is back-ended with over 75% to be added between FY16 and FY18.
The additional equity reflects growth capital as well as a buffer above the regulatory minimum. This is needed, said Fitch, because "the guidelines released on May 2 do not yet provide for a counter-cyclical capital buffer or additional capital for systemically important banks. Our calculations add half a percentage point of the additional common equity to the regulatory minimum, which banks may like to maintain to avoid breaching the conservation buffer with the attendant restrictions on dividends and other payouts".
The immediate impact of the Basel III capital regime is benign, with the common equity tier-1 ratio for many banks already close to 8% or higher. However, the shortfall increases between FY16 and FY18, mostly for government banks with loan growth outpacing internal capital generation, and the minimum capital ratios stepping up, stated the report.
"The largest requirement is by the State Bank group, reflecting its significant share in the banking system, followed by the mid-sized and small state-run banks with weaker internal capital generation. The large private banks fare better, due to their higher capital ratios and stronger profitability."
The report further notes that the need for fresh capital comes at a time when the performance of banks is clearly being affected by the economic slowdown, together with asset-quality pressures from concentrated exposure to infra firms and weak state-owned entities.
The viability ratings or the standalone financial ratings of some PSBs may be downgraded unless these pressures ease, though their IDRs should remain unaffected at the support rating floor due to expectations of continued support from the government, it added.
