The government's fund infusion plan is an important lifeline for PSU banks, but won't fully resolve their looming capital shortfall and weak banks will remain vulnerable to slippages in asset quality, Standard & Poor's said today.
"The central government's planned capital infusions comes at a good time for public sector banks. But they don't go far enough," Standard & Poor's Credit Analyst Amit Pandey said, adding that these banks would have to look for alternative sources of funding for capitalisation.
In a report titled 'India's Capital Infusions For Public Sector Banks Are Just A Breather', S&P said the standalone credit profiles and ratings on some PSU banks remain "vulnerable" to any further deterioration in asset quality, capital, and earnings.
"The Basel III-related capital requirements could lead weaker PSU banks to lose market share to better-performing banks in the private sector, public sector... ," it said.
Last month, the government had announced an infusion of Rs 70,000 crore in PSU banks through four years till 2018-19. Of this, Rs 25,000 crore would be injected in the current fiscal.
Besides, the PSU banks would raise an additional Rs 1.10 lakh crore from the markets in the next four years.
"For the next 12-18 months, the government's capital infusions will be an important lifeline for PSU banks. Many of the banks have a reduced ability to generate internal capital, largely because of the pressure on asset quality in the past few years. The weakening asset quality has resulted in lower net interest margins and higher credit costs," S&P said.
It said that higher allocation is a delicate balancing act for the government as it attempts to keep the country on the path towards fiscal consolidation.
PSU banks with lower capitalisation and internal generation of capital could become takeover targets, resulting in banking sector consolidation over medium to long-term, it said.
"The Indian government's recent steps to support the capitalisation of public sector banks won't fully resolve their looming capital shortfall," S&P said.
The report said the key three challenges being faced by government-run banks with regard to raising additional capital are low equity valuations, overcrowded market and regulations.
Shares of many PSU banks are being traded at a discount to their book value and "it is unlikely to change unless the banks make significant progress in resolving asset quality, profitability and governance issues, it added.
