International rating agency S&P Global Ratings today said that Indian state-run banks will need Rs 2.5 lakh crore capital infusion over the next three years to meet Basel-III requirements.
“The capital requirements will be sizeable… public sector banks need Rs 2.5 trillion to meet Basel-III requirements,” agency’s credit analyst Geeta Chugh told reporters over a conference call.
She said the banks, which are mired in high levels of stressed assets, cannot raise the money from the markets and will have to depend on the government for the infusion.
There are other avenues like issuing additional Tier-I bonds, which is yet to become popular, she added.
However, if the banks fail to raise the required amount of capital, it may lead to them losing market share as they will be unable to fund the new credit demand.
Difficulties surrounding capital infusions may also lead to consolidation, she said, elaborating that weaker and inefficient banks will be taken over by the stronger ones.
Chugh said even though the banks will be reporting non- performing assets of around 8.5 per cent, the overall stress according to the agency stands at up to 13 per cent and the troubles surrounding NPAs will continue at least for a year.
She said this will lead to the profitability of the banks being under pressure, which means the banks cannot generate internal accruals to be ploughed back to meet the higher capital requirements of the Basel-III framework.
Reserve Bank has decided to gradually increase the capital buffers and adopt the Basel-III requirements in full by April 2019.
Specifically, she said, iron and steel, infrastructure, construction and engineering sectors are the pain points for Indian banking system.
The problem of NPAs is much smaller in China than India, where the credit costs have gone up beyond 2 percentage points, she added.
Chugh said among the over two dozen state-run banks, only one — Union Bank of India — is having a negative outlook, which means there is a one in three chance of it getting downgraded.
The government had last year announced it will infuse Rs 70,000 crore into the state run banks over four years while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirements in line with global risk norms Basel-III.
In line with the blueprint, PSU banks are to get Rs 25,000 crore each in 2015-16 and 2016-17 fiscals. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19.
Assuming that the government will continue to support the banks, the agency has a ‘stable’ outlook on all other ratings, she said, adding that it had downgraded Indian Overseas Bank and Bank of India recently.
When asked about the rating impact of SBI’s consolidation efforts with the five associate banks, Chugh said it will not lead to any sizeable change.