Moody's revises its rating methodology for banks
Indian state-run banks will find it difficult to raise funds to meet Basel III norms, says Moody's. Reuters

Public sector banks in India could need up to $37bn in external capital as Basel III norms loom, assuming a moderate recovery in India's GDP growth, and a gradual decline in nonperforming loans from current levels, Moody's said on Monday.

"The Moody's-rated public sector banks will need to raise 1.5 to 2.2 trillion rupees, or $26-37bn between FY 2015 and the full implementation of Basel III in FY 2019," a Moody's statement said.

Moody's rated 11 public sector banks, representing 62% of net loans in the Indian banking system.

"Indian public sector banks barely meet current minimum capital requirements, and we anticipate that they will find it difficult to raise capital quickly in the current environment," said Gene Fang, a Moody's vice-president.

Basel III raises the minimum required capital levels for both total tier-1 to 7.0% and common equity tier-1 (CET1) capital to 5.5%, and banks will also need to meet a capital conservation buffer in order to pay dividends.

"That will pressure Indian public sector banks, as low capital levels remain a key credit weakness," the rating agency said.

Moody's said weak asset quality has depressed profitability and internal capital generation, leaving public sector banks dependent on periodic capital injections from the government.

"With Prime Minister Narendra Modi's new administration looking to reduce the country's budget deficit, the amount available for such injections is not likely to grow," Feng said.

Banks may tap the equity markets to raise capital, but despite the recent rally in the country's stock markets, banks could struggle to raise the required amount, with still-low bank valuations, Moody's said.

Moody's notes that a significant part of the required capital — around 800-900bn rupees, or $13-15bn — could be in the form of additional tier-1 capital.