Fitch Ratings said on Wednesday RBI declaring only ICICI Bank and SBI as Domestic Systemically Important Banks (DSIBs) reflects in part some of the broader capital challenges in India.
The fact the RBI designated only two banks as DSIBs reflects the already large capital requirement and the broader challenges financial institutions will face in meeting it, Fitch Ratings said in a report.
Fitch expects more banks to be designated DSIBs in future. In its report titled Indian Banks' Capital Challenges, Fitch said the government's capital support remains crucial for state-owned banks considering the shallow domestic additional tier I market and weak internal capital generation capability.
Fitch also said the weak state of public banks weighs on Indian banking sector as a whole with core capitalisation generally weaker than regional peers as a result. Average capitalisation at state banks is even worse when adjusted against a significant stressed asset stock and low-to-moderate provision cover, Fitch said.
The government recently announced capital infusion of Rs 70,000 crore over the next four years including RS 25,000 crore in the current fiscal.
Weak capitalisation and challenges from poor asset quality are to remain significant issues for India's state banks through the medium-term, Fitch Ratings said.
Whole host of other steps, including hiring private sector talent, formation of bank board bureau, are also planned with an aim to increase transparency in state-owned lenders.
While the government says PSU banks will raise Rs 1.1 lakh crore by tapping markets Fitch said it may not be sufficient due to weak asset quality and persistently low equity valuations.
It said India's private banks are in a much stronger capital position, and do not face the enormous challenges of their public counterparts. The private sector banks already benefit from stronger capitalisation, high internal accruals, higher equity valuations and much lower asset-quality issues. They have also been proactive in raising core equity at regular intervals, Fitch added.