India's State-Owned Banks Face Challenges on Capital Amid Government Support

India's state-owned banks will have to sacrifice growth for some time due to their continued challenges on capital despite the government's recent infusion of funds into nine public sector lenders. Global credit rating agency Fitch Inc. estimates that these banks will need 85% of the $200 billion capital required by India's banking system by 2019. The rating agency highlights the difficulties in raising core equity tier 1 capital for these banks, citing below-book valuations, poor asset quality, and weak earnings. In contrast, private sector banks are in a strong position to raise capital directly through the markets, as seen in HDFC Bank Ltd's successful Rs.10,000 crore share sale last week.

Key Takeaways:

• State-owned banks in India will require 85% of the $200 billion capital needed by India's banking system by 2019, according to Fitch Inc.
• The government's recent capital infusion of Rs.6,990 crore into nine state-owned banks, including State Bank of India (SBI) and Punjab National Bank (PNB), is part of the Rs.11,000 crore budgeted for the current fiscal.
• Private sector banks in India, such as HDFC Bank Ltd, are in a strong position to raise capital directly through the markets due to their healthier asset quality and earnings.
• State-owned banks continue to be largely dependent on government money for capital, whereas private banks can tap into the market for capital.
• Fitch forecasts Indian real GDP to expand by 6.5% this year, up from an estimated 5.6% in 2014, which may allow private banks to take advantage of this growth.
• State-run banks will likely have to sacrifice growth for some time due to their dependence on government capital.

Statistics:

• State-owned banks in India: 85% of $200 billion capital needed by 2019 required.
• Government's recent capital infusion: Rs.6,990 crore into nine state-owned banks.
• Budgeted capital infusion: Rs.11,000 crore for the current fiscal.
• HDFC Bank Ltd's share sale: Rs.10,000 crore.
• Fitch's GDP forecast for India: 6.5% growth in 2015, up from 5.6% in 2014.
• Capital requirements for Indian banking system by 2019: $200 billion.