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Basel III deferral to ease pressure on banks: India Ratings

PTI | Last Updated: Friday, March 28, 2014 - 16:16

Kolkata: Yesterday's announcement of deferral of Basel III norms till March 2019 by the Reserve Bank of India (RBI) would ease pressure on the banks, ratings agency India Ratings (formerly Fitch) said.

The ratings agency, in a report, said "the Reserve Bank of India?s (RBI) deferral of the Basel 3 implementation deadline by a year has eased the pressure on banks to issue hybrid Tier 1 capital in FY15."

The report said that this was a practical outcome of the current limited investor appetite for such instruments and the agency believes that the new deadlines do not dilute the spirit of Basel III.

However, capital injection will remain a priority for Indian banks through the rest of this decade, as the total capital required during the migration to Basel III will only go up due to the extra year added during the transition till March 2019, the report said.

The government?s commitment to maintain its majority shareholding in public sector banks assures them of steady equity injections, the agency stated.

The earlier guideline required banks to issue as much as Rs 26,000 crore of hybrid Tier I capital in FY15, significantly more than the Rs 11,200 crore of common equity Tier I that the government has budgeted to inject during the year.

India Ratings said while the budgeted amount of Rs 11,200 crore is now higher than the new requirement of under Rs 10 billion equity by PSU banks in FY15, injecting the full amount will help reduce capital pressures in subsequent years.

It can also help meet part of any shortfall in the hybrid tier 1 requirement of Rs 13,400 crore now estimated for FY15, the report said.

The revised norms have also tightened the loss absorption features of hybrid capital by eliminating the temporary write-down feature in both hybrid tier 1 and tier 2 instruments, it said.

"These instruments now can be either permanently written down or converted into equity, which improves the quality of capital by increasing any potential loss that investors may face."

The agency, however, said it's approach to rating the hybrid debt capital of a bank remains unchanged despite Thursday's revised guidelines.

Basel series of norms refer to a broad supervisory standards formulated by Basel Committee on Banking Supervision (BCBS) - of which India is a member - to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

First Published: Friday, March 28, 2014 - 14:48
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