Mumbai: India’s state-owned banks will have to sacrifice growth for some time as they continue to face challenges on capital despite Saturday’s infusion by the government into nine public sector lenders, global credit rating agency Fitch Inc. said in a report on Monday.
The credit rating agency estimates that state-owned banks in India will need 85% of the $200 billion capital needed by India’s banking system by 2019.
“The ability to raise core equity tier 1 capital in the market is limited for many state banks, owing to below-book valuations alongside poor asset quality and earnings. Financial trends have been weak in the nine months ending December 2014. 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 capitalization in the short term," the rating agency said.
On Saturday, the government announced a ₹ 6,990 crore capital infusion into nine state-owned banks including two of the largest, State Bank of India (SBI) and Punjab National Bank (PNB), based on efficiency parameters like return on assets and return on equity.
The infusion is part of the ₹ 11,000 crore budgeted by the government for the current fiscal. SBI got the maximum at ₹ 2,970 crore, followed by Bank of Baroda, which got ₹ 1,260 crore and PNB, which received ₹ 870 crore.
Fitch said while state-owned banks continue to be dependent on the government for their capital, private sector banks trade above their book value because of their healthier asset quality and earnings, pointing out to HDFC Bank Ltd’s ₹ 10,000 crore share sale last week that shows the contrast between public and private sector banks in India.
“India’s state banks continue to be largely dependent on government for capital, while the large private banks are in a strong position to raise core equity capital directly through the markets," Fitch said.
The rating agency noted the government’s new parameters in allocating capital, adding all the nine banks chosen had above-average efficiency parameters but added that state-owned banks continue to be too dependent on government money in contrast to private banks.
“Strengthening capital positions at this time will better position several private banks to take advantage of a pick-up in economic growth in 2015. Fitch forecasts Indian real GDP to expand by 6.5% this year, up from an estimated 5.6% in 2014. State-run banks on the other hand, will likely have to sacrifice growth for some time—given their dependence on government capital," the rating agency said.