New Delhi: Standard & Poor's on Wednesday said the government's plan to infuse capital into public sector banks is a "breather", but is unlikely to "fully resolve" their looming credit shortfall.
"The central government's planned capital infusions come at a good time for public sector banks. But they don't go far enough," Standard & Poor's Credit Analyst Amit Pandey said.
In a report titled - India's Capital Infusions For Public Sector Banks Are Just A Breather, S&P said the stand-alone credit profiles and ratings on some PSU banks remain sensitive 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 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.
It also said that PSU banks with lower capitalisation and internal generation of capital could become takeover targets, resulting in consolidation in the banking sector over the medium- to long-term.
"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.
S&P estimates that Basel III implementation will mean the banks will have fresh capitalisation needs of Rs 1.4 lakh for fiscal 2016-2019. They will likely require an additional Rs 80,000 crore to make provisions for non-performing loans and slippages from standard restructured loans.
"The banks will therefore have to look for alternate sources to increase their capitalisation or moderate their growth expectations," it said.
S&P sees a "very high likelihood" that the government will provide extraordinary support to the PSU banks, given the very important role they play and their very important link with the government.
Saying that the government's plan to revamp PSU banks is "ambitious", S&P said the other initiatives to improve their performance would take time to implement and success would depend upon execution.
"The government's other initiatives to improve the performance and governance of public sector banks are a step in the right direction. However, the process is likely to be protracted and a test of execution ability," Pandey said.
The government is focusing on improving the selection of board members and top management. The plan also envisages higher empowerment for banks while increasing accountability and offering incentives for good performance at the banks.
A new key performance indicator (KPI) framework for banks will include capital efficiency, business diversification, asset quality management, and financial inclusion.
