Indian banks need to raise Rs.2.7 trillion by March 2018
The sum is vital to comply with Basel III norms, says Crisil
Updated: Fri, Feb 22 2013. 12 03 AM IST
Mumbai: Indian banks need to raise Rs.2.7 trillion by March 2018 to meet the capital requirements mandated by Basel III international standards, Crisil Ltd, the local arm of global rating agency Standard and Poor’s, said on Thursday.
The Reserve Bank of India has already issued capital regulations that domestic banks have to start complying with in phases from April.
Of the Rs.2.7 trillion Indian banks need to raise, a minimum of Rs.1.3 trillion should be raised as equity capital and up to Rs.1.4 trillion as non-equity funds, Crisil said in a statement.
“Crisil believes that while India’s banks are comfortably placed to raise the equity capital component, the key challenge lies in raising non-equity Tier-I capital, given that the instruments’ features are riskier than under Basel II,” it said.
It is, therefore, crucial to develop bond markets to help banks raise the non-equity capital component, the statement said.
Banks may find it difficult to raise the Rs.1.4 trillion non-equity capital as such instruments carry higher risks, given their equity like features, including the likelihood of coupon non-payment and principal loss if a bank’s equity capital falls below prespecified thresholds, said Ramraj Pai, president, Crisil Ratings.
“This will limit investor appetite for such instruments. It will also reduce their attractiveness for banks, as these instruments will be costlier than those under Basel II,” Pai said. Nevertheless, non-equity Tier-I capital will still be cheaper than equity capital, Pai said.
According to the rating company, the range and depth of investors in such instruments can be expanded through a structured bond market development plan, which could include the alignment of investment norms for long-term investors such as insurance companies and provident funds.
“The government of India (GoI) can consider investing in non-equity Tier-I instruments of public sector banks (PSBs) through the holding company for PSBs proposed by GoI, thereby developing market acceptance for such instruments,” Pai said.
However, notwithstanding the challenges in raising non-equity Tier-I capital, Crisil believes that Basel III will structurally strengthen the banking sector by enhancing the quantity and quality of banks’ capital, the agency said.
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