Public sector banks would depend more on capital infusion from the Government, as their capital ratios could be impacted by falling internal accruals along with pressure on loan portfolio, said India Ratings & Research.
According to its report, the Government has been very supportive so far, which provides a strong support floor to the Long-Term Issuer Ratings of Government banks.
“Any dilution in the Government’s stance due to fiscal pressures could have an immediate impact on the ratings of weak banks. Public sector banks overwhelmingly depend on the Government for equity (capital),” the report said.
The Government and its wholly owned Life Insurance Corporation of India (LIC) injected about 95 per cent of equity into these banks between FY’10 and FY’13.
The Prime Minister’s Economic Advisory Council, which has an influential impact on policy matters, recently suggested that the Government dilute its stake in its banks to raise Rs 55,000 crore for equity injection.
The situation has deteriorated rapidly for weak banks — quarterly losses in Central Bank of India and United Bank of India during Q2FY14 were equivalent to about 10 per cent of their equity.
Provisions for rising NPAs (non-performing assets) were the largest contributors to the losses and may remain elevated for the next two quarters, given the weak operating environment and the banks’ low loan loss reserves of under 50 per cent of gross NPAs.
Equity injections have been announced by the Government, but the situation remains fragile.