New criteria equity infusion could trigger consolidation: ICRA

The new performance criteria for equity infusion into public sector banks (PSBs) could potentially lead to a shakeup in the sector in the absence of a transition period and given the pending structural issues, rating agency ICRA said.
Terming a step in the right direction, it said, "while the new criteria would reduce the burden imposed by the PSBs' equity requirement on government finances, this benefit is likely to be accompanied by other-possibly unintended-costs, which could be substantial."
Moreover, the new criteria reflect a dramatic shift from the past when government support was given and lent considerable support to PSBs' credit profiles, it said.

"While it may be argued that this approach led to complacency to an extent, it indeed was an anchor for the financial stability of PSBs, enabling many of them to extend credit to support economic activity when NPAs were high, profitability low, and dependence on external capital infusion significant," it added.
Meanwhile, another rating agency Fitch said that plans by the government to inject Rs 6,990 crore into nine banks, and the recent launch of a Rs 10,000 crore share sale by HDFC Bank, underscores the divergence between private and public banks with regard to core equity capital access.
Last week, the government announced new criteria for capital infusion based on PSBs' past performance.

To be eligible for the equity, a PSB's Return on Assets must be better than the average for all PSBs for the past three years, and its Return on Equity must be better than the average for the past one year.

The government announced infusion of capital in only nine out 22 PSBs as part of first tranche of total Rs 11,200 crore provided for during the Budget for the current fiscal.
The 13 'ineligible' banks would need about half the PSBs' total requirement of Rs 2,60,000 lakh crore in equity and around 40 per cent of the Rs 1,40,000 lakh crore in Additional Tier I capital to meet their growth objectives and to comply with Basel III norms, ICRA said.

According to Fitch estimates, state banks account for 85 per cent of the system's USD 200 billion (about Rs 12,40,000 crore) Basel III capital needs up to 2019.
This shortfall includes an estimate for the recently announced counter-cyclical capital buffer which will be phased in over the same period, it added.
Furthermore, Fitch said, "the ability to raise core equity Tier 1 capital in the market is limited for many state banks, owing to below-book valuations alongside poor asset quality and earnings.
Financial trends have been weak in the nine months ending December 2014. As a result, state-owned banks will have to continue relying on Additional Tier 1 (AT1) government capital injections to strengthen capital in the short term.