A seven-part plan to reform and inject Rs 700 billion into India's state-owned banks could be a significant step towards increased transparency, better governance and greater accountability for the sector, says Fitch Ratings.
The rating agency said that the measures aim to address critical aspects of public banks' day-to-day functioning, and will have positive effects for credit as they are implemented over the medium term.
However, the capital budgeted may not be sufficient, depending on growth expectations and how supervisory capital ratios develop for the banks, it said.
The government's expectation that public banks will be able to raise an additional Rs 1.1 trillion (USD16.9bn) in required core capital from the markets also seems overly ambitious, considering persistent low equity valuations. Valuations are unlikely to change until asset-quality woes begin to be addressed in a meaningful way.
In addition, the government's intent to follow through on its stated objective to minimise interference in public banks' business decisions remains somewhat uncertain. The ability of new leadership at the public banks to address both internal and external challenges to reform is also a key question, while resistance from unions to new hiring practices remains a risk.
The impetus for reforming public banks is high in light of growing competition and large capital shortfalls. In line with broader sector liberalisation, the central bank gave in-principal approval to 11 businesses to launch a new type of mobile-focused payments bank. These new banks will be allowed to take deposits up to Rs 100,000 (USD1,530) and transfer funds. Their focus on smaller deposit holders and mobile banking will add to competitive pressures for public banks, and could potentially pose risks to their market share over the long term.