Mumbai, Dec. 2: The Centre’s move to infuse an additional capital of Rs 6,000 crore in 10 public sector banks will improve their capitalisation levels though it may impact their return on equity (RoE) on account of the equity dilution that will ensue from an increase in government holding.

On Wednesday, the cabinet committee on economic affairs decided to pump more cash into nationalised banks to raise the government’s stake to around 58 per cent.

The PSU banks that are expected to get this infusion include Bank of Baroda, Oriental Bank of Commerce, Andhra Bank, Union Bank of India, Allahabad Bank, Dena Bank, Vijaya Bank, Punjab National Bank and Corporation Bank.

However, analysts felt that the long- term outlook for banks as a result of this measure would be largely negative.

Though the higher stake of the Centre will ensure that these banks have more headroom to raise cash from the markets as the government holding in state-run banks cannot fall below 51 per cent, brokerage Prabhudas Lilladher in a report said one of the consequences of the infusion would be that the RoEs (net profit divided by equity) of these banks would compress.

Its analyst Abhijit Majumder and Umang Shah said the proposed capital infusion plan was likely to result in equity dilution from 0.5 to 15 per cent.

They said Oriental Bank of Commerce was likely to witness the highest equity dilution of 15 per cent followed by Dena Bank, Andhra Bank and Bank of Baroda.

“For all these banks the government holding is likely to increase substantially from current levels. As a fallout of this, the RoE compression for Andhra Bank is the highest of over 500 basis points, followed by Oriental Bank of Commerce and Dena Bank,” they said.

According to the analysts, the infusion is likely to see their Tier I capital adequacy ratio (ratio of a bank’s capital to its risk weighted assets) rising by over 1 per cent and that Oriental Bank of Commerce, Bank of Baroda and Andhra Bank will be the biggest beneficiaries in this front.

In a separate report, rating agency Crisil said the government’s move to increase its stake in 10 PSU banks to 58 per cent would help the lenders improve their credit risk profiles.

According to Pawan Agrawal, director of Crisil Ratings, the move “will strengthen the banks capitalisation levels, particularly for those banks where the ability to raise capital from the market was relatively constrained by the government holding at or around 51 per cent.

The rating agency added that its expectation of government support for these banks had become stronger with the Centre ensuring that its articulation of such support was backed by steady capital infusion over the past two years.