The Centre’s plans to infuse ₹6,990 crore worth capital into nine state-owned banks and the recent ₹10,000-crore share sale by HDFC Bank, underscores the divergence between private and public banks with regard to core equity capital access, says Fitch Ratings.
India’s state-owned banks continue to be largely dependent on the government for capital, while the large private banks are in a strong position to raise core equity capital directly through the markets, Fitch said in a report.
“The capital injection is part of a budgeted $1.8 billion (₹11,000 crore) allocation for banks in FY15, and will be credit positive for the nine recipient banks.”
The institutions included State Bank of India, Bank of Baroda and Punjab National Bank as well as six other smaller institutions.
Basel-III requirement According to Fitch estimates, state-owned banks account for 85 per cent of the system’s $200 billion Basel-III capital needs up to 2019.
This shortfall includes an estimate for the recently announced counter-cyclical capital buffer which will be phased in over the same period.
Further, the ability to raise core equity Tier 1 capital in the market is limited for many state-owned banks, owing to below-book valuations alongside poor asset quality and earnings. As a result, Fitch maintains that state-owned banks will have to continue relying on Additional Tier 1 hybrid instruments and government capital injections to strengthen capitalisation in the short term.