Equity raising, reforms to help banks meet Basel norms: Fitch

Recent equity-raising by banks, coupled with the reforms, will help them comply with the Basel III guidelines, says a report by Fitch Ratings.

Updated: Feb 08, 2013, 22:57 PM IST

Mumbai: Recent equity-raising by banks, coupled with the reforms, will help them comply with the Basel III guidelines, says a report by Fitch Ratings.

"Equity-raising by banks in the past couple of months is the first step in their transition towards Basel III requirements," the report said today. New investor-friendly reforms could support this if the trends continue, it added.

Three financial sectors reforms laws, Prevention of Money Laundering (Amendment) Bill and Banking Laws (Amendment) Bill, 2012 have become law of the land with President Pranab Mukherjee giving assent to them. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2012 also got the President's assent recently.

IndusInd Bank issued Rs 2,000 crore through qualified institutional placement (QIP) route, improving its tier-I ratio to 14.85 per cent by the end of December.

Axis Bank boosted its equity base by 20 per cent through a Rs 5,500-crore capital placement in January.

The government has decided to infuse Rs 12,517 crore into public sector banks to boost their capital adequacy, it noted.

As per the report, banks need stronger access to capital markets to support growth and comply with the Basel-III regime that will be implemented during April 2013-March 2018 period.

The Reserve Bank has estimated additional capital requirements for private banks in the range of Rs 20,000 -25,000 crore (USD 3.6-4.6 billion) for Basel III compliance.

Public sector banks will require Rs 88,000-90,000 crore of fresh capital, assuming that the government's share is maintained at the current levels.

"The government now has an additional source of funding for the banks, as amendments in January allow the National Investment Fund to use proceeds from disinvestment," the report said, adding that public sector lenders need to access capital markets to source their remaining Basel-III capital needs of around Rs 52,000-59,000 crore.

The report also noted that private banks are better placed to access the equity capital markets.

On raising of private equity investment, the report said, "This could prove to be challenging for state-owned banks, as they typically have weaker internal capital generation than their private sector peers. Those with weak asset quality and funding profiles are likely to be the most constrained."

The report also said the Banking Laws (Amendment) Bill 2012, which increased the voting rights of a shareholder to 26 per cent from 10 per cent in private sector banks and to 10 per cent from 1 per cent for public sector banks, could help to attract the necessary investment.

"The sector could see greater investor interest if this trend to increase private participation continues," it said, adding foreign banks are unlikely to hold significant minority stakes given the punitive capital-deduction requirements under Basel III norms.