Basel III pressures on working capital.

India’s public sector banks will need substantial capital to make large haircuts on loans to unviable stressed projects and to meet rising Basel III requirements, according to a reported by S&P Global Ratings published on 1 August 2017.

“The lack of capital restricts the ability of India’s public sector banks to write down non-performing loans to more accurate levels,” said S&P Global Ratings credit analyst Geeta Chugh in the report ‘Indian Banks May Need Rs.1.9 Trillion Of Additional Capital By March 2019″.

“Weak profitability and rising capital demands from Basel III implementation will also continue to pressure the capitalization of many of these banks,” said Chugh.

“We estimate that Indian banks may need a minimum of about US$29.6 billion over the next two years.”

Capital requirements form a high 34% of the public sector banks’ Tier 1 capital and about 40% of their market capitalization.

The Indian government’s “Indradhanush” plan to infuse capital into banks remains modest.

Many public sector banks are already approaching close to the minimum thresholds.

The banks will, therefore, have to look for alternate sources to increase their capitalization.

“India’s public sector banks face three key challenges in tapping equity capital markets: low equity valuations, overcrowding in the market, and regulations.

At the same time, they may find it hard to raise money via the issuance of additional Tier-1 capital instruments because the risk of default on these instruments is rising,” added S&P Global Ratings credit analyst Deepali Seth-Chhabria.

Nevertheless, S&P believe the government’s commitment of support to public sector banks remains in place.

The credit profiles of public sector banks continue to benefit significantly from ongoing capital support and very high likelihood of government support in the event of distress.

“We think the polarization of the market in favor of stronger banks will continue as banks clean up their balance sheets and the full requirements of Basel III kick in,” she said.

S&P expects the weak public sector banks to continue to lose market share to the better-performing banks in the private sector, profitable public sector banks, and non-bank finance institutions or domestic debt capital markets.

“We believe public sector banks with lower capitalization and internal generation of capital could become takeover targets, resulting in consolidation in the banking sector over time,” said Seth-Chhabria. fii-news.com