Despite the government?s equity infusion of R20,000 crore to public sector banks in the last financial year, the tier I capital ratio of banks?which is a measure of a bank?s core capital, including equity capital and disclosed reserves?declined to 9.5% in FY 11 from 10.5% in FY 10, according to global rating agency Moody?s. So, the increase in the capital infusion has not been able to meet the capital requirements of growing risk-weighted assets and provisions required for the increase in non-performing loans.
In fact, Indian banks rank low in tier I capital ratio as compared to banks in other emerging markets, like Brazil, Russia and China, where it is over 10%. However, the ratio for Indian banks is higher than that of their peers in the Philippines, at 8.9%, and Vietnam at 8%. Though the system?s capitalisation has improved since the mid-2000s because of the government?s capital injection, it is still not sufficient to protect the sector from the challenges.
While downgrading the Indian banking system to negative from stable, rating agency Moody?s has underlined that the strain on capital will continue and bank?s internal capital generation will still fall short of meeting the pace of loan growth. It projects that the core tier I capital ratio to be below 9% by FY 2013 and that banks will need to raise fresh core tier I capital to support loan growth.
Though the government has allocated R6,000 crore of equity infusion for public sector banks in FY12, given the fiscal pressure it is facing, the timing of the infusion remain uncertain. Interestingly, Moody?s says private sectors banks have raised capital by which they would be able to maintain their growth and provisioning requirements over the next two years.