In order to write down non-performing loans and to meet rising Basel III requirements, the public sector banks (PSU) may need at least Rs 1.9 trillion additional capital over the next two years. Credit rating agency, S&P Global Ratings in its latest report has also noted that the lack of capital will put restriction on the lenders' ability while making haircuts on these loans.
The rating agency said that weak profitability along with rising capital demands from Basel III implementation will also continue to pressure the capitalisation of many of PSU banks and further suggested to look for alternate sources to increase their capitalisation. The report is also expecting that the government's commitment of support to PSU banks will remain in place.
As per the report, Indian PSU banks face difficulties to raise funds from the equity capital markets due to low equity valuations, overcrowding in the market, and regulations. Besides, it said that amid rising risk of default on additional Tier-1 capital instruments, PSU banks would also find it hard to raise money via the issuance of these instruments.
Furthermore, S&P mentioned that weak PSU banks would continue to lose market share to the better-performing private sector banks & profitable PSU banks and non-bank finance institutions or domestic debt capital markets, adding that the banking sector may witness consolidation over time as public sector banks with lower capitalisation and internal generation of capital could become takeover targets.