Moody's estimates that public-sector Indian banks that it rates could need up to USD 37 billion in external capital as Basel III looms, assuming a moderate recovery in India's GDP growth, and a gradual decline in nonperforming loans from current levels.

More specifically, Moody's-rated public-sector banks in India will need to raise Rs 1.5 to Rs 2.2 trillion, or USD 26 to USD 37 billion between FY 2015 and the full implementation of Basel III in FY 2019, says Moody's. Moody's rates 11 public sector banks, representing 62% of net loans in the Indian banking system.

''Indian public sector banks barely meet current minimum capital requirements, and we anticipate that they will find it difficult to raise capital quickly in the current environment,''said Gene Fang, a Moody's vice president.

''Fang was speaking on the release of a new Moody's report, titled "Indian Banks Could Need USD 26-37 billion in External Capital for Basel III Compliance.''

Basel III raises the minimum required capital levels for both total Tier 1 to 7% and Common Equity Tier 1 (CET1) capital to 5.5%, and banks will also need to meet a Capital Conservation Buffer in order to pay dividends, says Moody's. That will pressure Indian public-sector banks, as low capital levels remain a key credit weakness, added the rating agency.

''Weak asset quality has depressed profitability and internal capital generation, leaving public-sector banks reliant on periodic capital injections from the government,'' added Fang. ''With Prime Minister Narendra Modi's new administration looking to reduce the country's budget deficit, the amount available for such injections is not likely to grow.''

Banks may tap the equity markets to raise capital, but with still-low bank valuations, banks could struggle to raise the required amount, says Moody's. That's even with the recent rally in Indian stock prices, says the rating agency.

Moody's notes that a significant part of the required capital-around Rs 800 billion to Rs 900 billion, or USD 13 to USD 15 billion-could be in the form of Additional Tier 1 (AT1) capital.