PSU banks to depend more on equity infusion, says report

DECLINING internal accruals and pressure to grow loan portfolio may make India’s public sector banks depend more on the government for capital, rating agency India Ratings and Research said in a report released on Tuesday. The government and Life Insurance Corporation of India (LIC) injected about...
95 percent of equity into the PSU banks between FY10 and FY13. This year the government will infuse Rs 14,000 crore in the PSU banks.
The report said the situation has deteriorated rapidly for weak banks, such as Central Bank of India and United Bank of India whose second quarter losses on account of rising NPAs, were equivalent to about 10 percent of their equity. The report added that banks’ deteriorating performance also brings the role of hybrid debt capital in absorbing losses under focus.
"In our base case scenario, the government's peak annual contribution to banks' equity remains under 1 percent of GDP under the Basel III regime till March 2018. This is manageable but needs to be planned to avoid any pile-up towards the end," the report added.
The rating agency considers the Basel III guidelines announced by RBI as a credit positive for Indian banks and any dilution in the guidelines may be counterproductive if viewed by the markets as a sign of systemic weakness.
"The market for Basel III Tier 2 instrument is fledging in India and investors will benefit if the Reserve Bank of India (RBI) articulates a framework for invoking losses on the holders of this instrument," the report said.
The report said the government has been very supportive so far, which provides a strong support floor to the long-term Issuer Ratings of government banks. Any dilution in the government’s stance due to fiscal pressures could have an immediate impact on the ratings of weak banks, it said.
The market for Basel III Tier 2 instrument is fledging in India and investors will benefit if the Reserve Bank of India (RBI) articulates a framework for invoking losses on the holders of this instrument.
The Prime Minister’s economic advisory council recently suggested for government dilution of stake in its banks to raise Rs 550 bn for equity injections. The government is trying to strike a balance between managing the fiscal deficit, maintain confidence in its banks that control over 70 percent of system assets and 85 percent of branches in India.