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Banks need up to Rs 5 lakh cr capital to meet Basel norms: ICRA

Last Updated: Friday, May 4, 2012 - 00:18

Mumbai: Rating agency ICRA on Thursday said banks in the country will require between Rs 3.9-5 lakh crore as capital to comply with Basel III norms.

"Banks will need Rs 3.9-5 trillion capital over the next six years, out of which common equity requirements will be Rs 1.3-2 trillion; Rs 1.9 trillion for additional tier I; and Rs 1 trillion for tier II," an ICRA note said here on Thursday.

This is achievable, "so long as banks can find investors for the riskier additional tier I capital," it said.

The Reserve Bank yesterday issued final guidelines for Basel III beginning January 1, 2013 and to be implemented by March 31, 2018.

The new norms ask banks to maintain a minimum 5.5 percent in common equity by March 31, 2015 against 3.6 percent now, apart from creating a capital conservation buffer consisting of common equity of 2.5 percent by March 31,2018.

It also hiked the minimum overall capital adequacy to 11.5 percent by March 31,2018 against 9 percent now.

Noting that around 80 percent of common equity need relates to public sector banks, ICRA said of the total equity requirement of the PSBs, the government share would be Rs 0.3-0.8 trillion going by the current policy of government holding 58 percent in state-run banks.

However, the report said that if one is to exclude 2007-08, when some large banks took advantage of the buoyancy in the capital market to raise around Rs 0.5 trillion, the equity raised by banks over the 2008-09-2001-12 period was only around Rs 0.5 trillion, out of which around 60 percent was infused by the government or LIC.

"Incremental equity requirement appears manageable, considering past trends in capital mobilisation," the report said, adding "banks raised over Rs 1 trillion in equity during 2007-08 to 2011-12, of which around 54 percent were mobilised by PSBs and 46 percent by private banks."

But, it warned that,"if banks are unable to mop up the required additional tier I and the gap is bridged by raising common equity, incremental equity requirement may go up to a high of Rs 3.2-4 trillion over the next six years out of which Centre's share will be Rs 1.2-1.7 trillion."

The report also said that while the equity target may appear easy at first glance, it may not prove to be so eventually, given that RBI has also introduced loss-absorption features in the additional tier I capital instruments.

These features can very much limit investor appetite for these instruments as it will be difficult to assess the probability of their conversion into equity or of a principal write-down in a stress scenario.


First Published: Friday, May 4, 2012 - 00:18
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