"Government officials have indicated that capital injections are to be targeted at supporting lending growth, which suggests the healthiest state banks - generally the larger ones - will be the main recipients," Fitch said in a statement.
The government is front-loading the capital injections it plans to provide through recapitalisation bonds over the next two years, with the first tranche of Rs 800 billion ($12 billion) accounting for 60 per cent of the total.
Fitch said banks are pushing for recapitalisation bonds to have statutory liquidity ratio (SLR) status, which would boost their tradability and enhance liquidity, but inferences so far suggest that the bonds are likely to have non-SLR status and will be non-tradable.
"The government appears set to prioritise lending growth when allocating capital. This is likely to mean that banks currently in the Reserve Bank's prompt corrective action (PCA) framework will receive no more than the capital necessary to ensure they do not breach minimum regulatory capital requirements," it said.
Fitch said it, therefore, expects most of the fresh capital to be provided to large banks that have scope to grow.
"The injections could allow some of these banks to pursue stronger expansion, particularly if the improvement in their financial profiles helps them independently tap equity capital markets," it added.
The government in October last year announced plans to infuse Rs 2.11 trillion into PSU banks over the next two years. Of this, Rs 1.35 lakh crore would be infused through issue of recapitalisation bonds and remaining Rs 58,000 crore through government stake dilution.