Public-sector banks prepare to shore up capital before ECL shift

Move will also help lower govt shareholding

Several public-sector banks, including Bank of India, Indian Bank and Indian Overseas Bank, are preparing to raise capital through equity issuances and bond sales to bolster common equity tier-1 (CET1) buffers ahead of the introduction of the expected credit loss (ECL) framework for loan-loss provisioning, scheduled to take effect in April 2027.

 

The fundraising exercises are also expected to support efforts to dilute government ownership, which remains above 90 per cent for some of these lenders.

 

Mumbai-based Bank of India’s board on Thursday had approved plans to raise ₹7,500 crore in FY27, comprising ₹2,500 crore through additional tier-1 (AT1) bonds and ₹5,000 crore through tier-II bonds. The lender’s capital adequacy ratio stood at 17.09 per cent at the end of December 2025, including a CET1 ratio of 13.76 per cent. AT1 issuances would strengthen the bank’s CET1 capital base.

 

Chennai-based Indian Bank has also secured board approval for fundraising measures that include a ₹5,000 crore qualified institutional placement (QIP).

 

“Our capital adequacy ratio remains strong at around 18 per cent and we do not need capital for growth. However, with the implementation of ECL norms, we may consider raising capital, potentially through a QIP,” Binod Kumar, managing director (MD) and chief executive officer (CEO) of Indian Bank, told Business Standard. “We already have board approval in place, and a ₹5,000 crore QIP forms part of the plan if required.”

 

Kumar said the bank was still assessing the provisioning impact of the ECL framework and expected greater clarity within the next 10 to 15 days. “We aim to absorb the impact quickly, possibly within the first half of the year,” he added.

 

Indian Bank’s capital adequacy ratio stood at 17.93 per cent at the end of March 2026. 

 

Last week, the banking regulator issued final guidelines for the ECL framework, which will come into force on April 1 next year. Under the new regime, banks will be required to make provisions based on expected losses rather than the current incurred-loss approach. The transition is expected to increase provisioning requirements across the banking sector. Rating agency Crisil has estimated a one-off impact of up to 120 basis points on the CET1 ratios of domestic banks.

 

Another Chennai-based lender, Indian Overseas Bank, said it could also consider raising capital to meet regulatory requirements.

 

“We may still look at raising capital for other reasons, including regulatory considerations and reducing government shareholding,” Ajay Kumar Srivastava, MD & CEO of Indian Overseas Bank, told Business Standard. “Government holding currently stands at around 92.44 per cent, and we would like to move closer to the minimum public shareholding requirement of 75 per cent. Capital raising could therefore serve both objectives, although specifics will be decided after board approval.”

 

The bank’s capital adequacy ratio stood at 19.78 per cent, well above the regulatory requirement of 11.5 per cent, which Srivastava said was sufficient to support growth for the next three to four years. “Growth itself does not necessitate immediate capital raising,” he added.

 

The bank’s capital adequacy ratio stood at 19.78 per cent, well above the regulatory requirement of 11.5 per cent, which Srivastava said was sufficient to support growth for the next three to four years. “Growth itself does not necessitate immediate capital raising,” he added.

 

Similarly, New Delhi-based Punjab & Sind Bank has secured board approval to raise ₹3,000 crore through a QIP, a move that would also help reduce government ownership, currently at 93.85 per cent.

 

Under the ECL framework, banks will estimate losses using metrics such as probability of default (PD), loss given default (LGD) and exposure at default (EAD). The new rules are intended to encourage earlier recognition of credit deterioration, improve risk visibility and enable more proactive portfolio management.

 

Rating agency ICRA estimates that the transition to ECL norms could reduce reported core capital ratios by less than 150 basis points at the point of implementation.

 

According to ICRA, banks with thinner capital buffers, larger overdue loan books, substantial sanctioned but undisbursed limits, and sizeable non-fund-based exposures are likely to face greater pressure during the transition. Such lenders may need to raise additional capital or use the transition period extending to FY31 to phase in the impact on CET1 capital.  “Banks availing such forbearance are not expected to be viewed favourably by investors, making it even more difficult for them to raise capital in such a situation,” it added.