The government’s recent steps to support the capitalisation of public sector banks won’t fully resolve their looming capital shortfall, according to Standard & Poor’s Ratings Services.

As part of its plan to revamp public sector banks (PSBs), the government recently announced that it will allocate capital to each of the banks for financial years 2016-2019 (ending March 31).

It will increase the capital allocation for fiscal 2016, and commit to further allocation in the next few years, if needed.

The government has earmarked ₹70,000 crore ($11 billion) for capital infusions during 2016-2019.

“The Central Government’s planned capital infusions come at a good time for PSBs. But they don’t go far enough,” said Standard & Poor’s credit analyst Amit Pandey in a report titled ‘India’s capital infusions for PSBs are just a breather’.

Standard & Poor’s has estimated that Basel III implementation will mean the banks will have fresh capitalisation needs of ₹1.40 lakh crore ($22 billion) for fiscal 2016-2019.

For NPAs Banks will likely require an additional ₹80,000 crore ($13 billion) to make provisions for non-performing loans and slippages from standard restructured loans. The banks will, therefore, have to look for alternative sources to increase their capitalisation or moderate their growth expectations.

“The government’s other initiatives to improve the performance and governance of PSBs, are a step in the right direction, in our view. However, the process is likely to be protracted and a test of execution ability,” said Pandey.

The Basel III-related capital requirements could lead weaker PSBs to lose market share to better-performing banks in the private sector, public sector, non-banking financial institutions, and debt capital markets.

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