Major public sector banks in India will need to raise Rs 1,50,000 crore to Rs 2,20,000 crore ($26-$37 billion) between FY2015 and the full implementation of Basel III in FY 2019, said Moody’s in a report.

The rating agency estimated that public sector Indian banks that it rates could need that external capital, assuming a moderate recovery in India's GDP growth, and a gradual decline in non-performing loans from current levels.

Moody's rates 11 public sector banks, representing 62 per cent of net loans in the Indian banking system.

"Indian public sector banks barely meet current minimum capital requirements, and we anticipate that they will find it difficult to raise capital quickly in the current environment," said Gene Fang, Moody's Vice-President.

Banks may tap the equity markets to raise capital, but with still-low bank valuations, they could struggle to raise the required amount. That's even with the recent rally in Indian stock prices, the report highlighted.

Required capital

Moody's noted that a significant part of the required capital — around Rs 80,000 crore to Rs 90,000 crore ($13 to $15 billion) could be in the form of Additional Tier 1 (AT1) capital.

Basel III raises the minimum required capital levels for both total Tier 1 to 7.0 per cent and Common Equity Tier 1 (CET1) capital to 5.5 per cent, and banks will also need to meet a Capital Conservation Buffer to pay dividends. That will pressure the Indian public sector banks, as low capital levels remain a key credit weakness, Moody's said.

"Weak asset quality has depressed profitability and internal capital generation, leaving public sector banks reliant on periodic capital injections from the government," added Fang.

"With Prime Minister Narendra Modi's new administration looking to reduce the country's budget deficit, the amount available for such injections is not likely to grow."