Fitch: New Equity and Reforms Help Indian Banks' Basel III Goals

Private banks with better credit metrics are likely to find it easier to access equity capital markets. But changes to the competitive landscape from the much-anticipated issuance of new banking licences could increase demand for capital.

Raising private equity could prove challenging for state-owned banks, as they typically have weaker internal capital generation than their private peers. Those with weak asset quality and funding profiles are likely to be the most constrained.

The Banking Laws (Amendment) Bill 2012 could help to attract the necessary investment. The cap on voting rights of a shareholder has increased to 26% from 10% for private banks, and to 10% from 1% for government banks. The sector could see greater investor interest if this trend to increase private participation continues. But foreign banks are unlikely to be willing to hold significant minority stakes given the punitive capital-deduction requirements under Basel III for holding investments greater than 10% in other financial institutions.

The bank reforms also relaxed the rules for public sector banks to access capital markets, allowing for the issuance of preference shares and rights or bonus share issues. The ability to raise capital through various means could help the banks with the transition to Basel III.

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