India's public sector banks need 1.9 trillion Indian rupees of capital over the next two years to write down nonperforming loans and meet requirements under Basel III, S&P Global Ratings said.

At the same time, weak profitability and growing capital requirements under Basel III rules will further pressurize capitalization of many of India's public sector banks, the rating agency said Aug. 1. Since the Indian government's capital injection program for the banks remain modest, they need to find alternate sources to boost their capital levels, S&P added.

The banks, however, may find it challenging to raise funds via the issuance of additional Tier-1 capital instruments as the risk of default on such instruments is rising, S&P said. Other challenges include low equity valuations, overcrowding in the market and regulations.

S&P said it expects public sector banks with lower capitalization and internal generation of capital to become takeover targets.

As of Aug. 1, US$1 was equivalent to 64.07 Indian rupees.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.