'Basel-III may result in 1/2 of banks breach capital triggers'

Mumbai: Increased capital requirements under Basel-III norms may result in half of domestic lenders breaching trigger levels, Fitch said today while suggesting that government allocate more capital to state-run banks as they will be the most affected.

With poor existing capital buffers and weak prospects for raising capital through market channels, the state-run lenders are most at risk, said the credit rating agency.

"The progressive increase in minimum capital requirements under Basel III is likely to put nearly half of Indian banks in danger of breaching capital triggers," it said.

At the end of June 2016, the total capital adequacy ratio (CAR) for 11 banks was at or lower than the minimum of 11.5 per cent required by end-March 2019, when the capital- intensive Basel-III framework will be adopted in full.

There is a roadmap of steady increase in the capital buffers till the full adoption, Fitch said, adding that six of the 11 banks do not have sufficient capital to meet the March 2017 milestone.

It said the minimum total CAR is a prerequisite for payment of coupons on both legacy and Basel III perpetual debt capital instruments.

Fitch had recently come out with an estimate saying that the Indian banking system will require USD 90 billion in fresh capital till financial year 2018-19, when it will complete the migration to the capital-intensive Basel-III framework completely. It had said that the 27 state-run banks will need 80 per cent of this estimate.

In the note issued today, Fitch acknowledged government's commitment to pump in USD 10.4 billion under the Indradhanush programme and also the frontloading of USD 3.4 billion this fiscal but called for more steps and money.

"We believe that more capital will be needed from the government to restore market confidence," it said, adding that the state-run lenders are "heavily reliant" on the government for new capital.

"Sharply deteriorating financial profiles have raised the standalone credit risks of state banks over the last year. Equity valuations have suffered as a result. Most continue to trade at heavy discounts to their book value, which acts as a significant constraint on raising new core equity," it said.

It added that largest lender State Bank of India's proposed USD 1 billion dollar-denominated additional tier-I capital infusion will serve as a pricing benchmark for other banks keen to access the dollar AT1 market.

The RBI move to allow banks to raise capital through the masala bonds route of raising rupee-denominated bonds offshore help widen the investor pool and ultimately deepen the market for AT1 bond issuance.

However, despite this, the state-run banks will continue to face difficulties in raising capital from the market, which will keep their viability ratings under pressure and will weigh on the sector outlook, it said.