Public sector banks will gain from stake dilution: Fitch

Ratings agency Fitch Friday said that the government's plans to reduce stakes in state-owned banks to 52 percent by 2019 will enable these entities to exercise greater flexibility in raising capital in the equity market.

According to the ratings agency, the government's decision for dilution has not indicated a broader privatisation initiative in the sector, and that the stakes are unlikely to go below 51 percent in the medium term.

Thus, the rating agency said that it expects access to core equity to remain challenging.

"As such, state-owned banks will likely have to continue relying on additional tier 1 (AT1) hybrid instruments to strengthen capitalisation in the short term, despite the government's planned sell-downs," the ratings agency in its report on the sector said.

Further, the report estimates that Indian banks will require $200 billion capital under Basel-III norms till 2019, of which the state-owned banks will account for around 85 percent.

The progress to strengthen capital has been slow due to a low internal rate of capital accretion and limited access to core equity.

Fitch said that asset quality and earnings continue to remain stressed for most state banks notwithstanding some signs of early recovery.

"Expectations of higher restructuring and muted credit growth could further mean that earnings recovery will be slow and protracted," the report said, adding that as such, the plan to reduce government stakes may have to wait until there is a meaningful recovery in earnings.

State banks in India accounts for nearly 75 percent of total banking system assets but holds 90 percent of the system's stressed loans.

Fitch added that a cyclical recovery in FY16 should help ease the level of stressed assets, which is expected to peak by March 2015.