|SBI chairman Bhattacharya|
A DAY after State Bank of India chairman Arundhati Bhattacharya's statement on December 11 that the Cabinet’s decision to pare stake in state-owned banks will lead to a fresh round of banking reforms, and force these financial institutions...to be more competitive, ratings agency Fitch on December 12 said 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.
Bhattacharya had said the government should allow public sector banks (PSBs) to look at different alternatives to raise funds to meet Basel-III norms, including issuing shares with differential voting rights.
“The news that the government has allowed PSBs to bring down govt stake to 52 per cent kicks off the next round of reforms because for the first time there is a very clear signal that banks can pick up funds from the market,” Bhattacharya said at the concluding day of the Delhi Economics Conclave.
The ratings agency said 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.
“The big daddy back there is not going to be around to give them capital as and when they need and if they need to be competitive and want to grow, they definitely need to look at other places for more capital,” she said.
Finance minister Arun Jaitley had earlier said in his Budget speech that to be in line with Basel-III norms there is a requirement to infuse Rs 2.4 lakh-crore into the banking system as equity by 2018. “To meet this huge capital requirement, we need to raise additional resources to fulfil this obligation,” he had said.
Bhattacharya said apart from paring stake, the Centre also has to create a clear roadmap on how much the banks need to do to meet the Basel-III norms.
“The writing on the wall is very clear. There has to come a time where they have to think of differential voting rights and banks have the freedom to raise equity. It is time to lay out some kind of road map on how much the banks need to do and how much support they would get,” she pointed out.