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Indian banks require at least $200 billion in more capital up to 2018-19 as growth picks up and lenders progress towards meeting the new Basel-III norms
Fitch Ratings said on Thursday that many Indian public sector banks (PSBs) suffering from lower capitalisation, highly stressed assets and weak earnings will find difficult to raise funds in the equity market.
Instead of issuing equity, these might have to use additional tier-I debt (AT1) instruments to bridge their capital needs, it said.
Indian banks require at least $200 billion in more capital up to 2018-19 as growth picks up and lenders progress towards meeting the new Basel-III norms.
Investor appetite remains untested for AT1, which meets the largest share of banks' capital requirements. Last month, the Reserve Bank of India eased norms for At1 instruments compliant with Basel-III, to entice investors to put money in these bonds.
Fitch said these amendments should help build investor interest, though the local market might not be able to completely fulfill the AT1 demand of banks. Involving retail investors also introduces a level of moral hazard risk (a situation when a party is more likely to take a risk because the costs that could result will not be borne by it).
The issuance of these loss-absorbing instruments has been restricted thus far to three banks and is confined to the domestic market. Mumbai-based Bank of India was the first to raise capital through AT1 bonds. It raised about Rs 2,200 crore at a coupon rate of 11 per cent in the second quarter. It was seen as a high coupon rate, compared to the yield on the benchmark 10-year government bond.
Fitch expects Indian banks’ stressed assets to improve after FY15 but at a slow pace, as the large inventory will take time to resolve. Progress will be led by improvement in cyclical sectors, which are likely to benefit from a sustained economic recovery.
State-owned banks reported stressed assets of around 12 per cent in FY14 versus around four per cent in private banks.
Some signs of asset-quality stability are beginning to emerge at certain large PSBs. The trend is expected to gain strength as economic growth picks up pace, with real gross domestic product growth projected at 5.5 per cent in FY15 and 6.5 per cent in FY16. That is against the backdrop of a new government, with a clear electoral mandate and a renewed focus on policy reforms, which is likely to set the stage for a cyclical recovery, Fitch added.
