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were already discovered' and well researched, which may have squeezed out most of the information
gaps.
Market validation provides a useful feedback to the rating process, more so now when government
banks will need to potentially double their stock of common equity capital over the next four years to
meet the Basel 3 guidelines. Any breach of the minimum capital ratio may lead to a deferral in the
hybrid tier 1 instruments, leadi n g t o t h e i r d o w n g r a d e.
F lexibility to raise equity through strong market support is a vital input in determining the standalone
creditworthiness of a bank. A quick-andeasy measure can be the PBV, particularly a sustained level of
above average valuation.
For banks with weak valuation, an above-average performance in a bull market indicates improving
access; however, these banks may remain hostage to market conditions unless their valuations improve
on a sustained basis. This is the case with most PSU banks, which puts greater onus on the government
to inject the required capital.
Equity injection in government banks will be critical from 2017, when most of the Basel 3 deleveraging
will start to kick in for Indian banks. Tier 1 levels need to significantly improve by then, else
government banks may struggle to raise growth equity, leading to a credit squeeze in the economy. That
may well prove to be an opportunity for private banks and NBFCs to exploit.
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