Banks face tough capital test

Mumbai, March 18: Basel III could turn out to be the Big Bogeyman for Indian banks.

Global rating agency Standard and Poor's (SandP) today forecast that Indian banks would need to raise Rs 2.6 lakh crore to meet the tough new capital standards, that will kick in from April this year, in a base case scenario. That figure could balloon to Rs 3.8 lakh crore if the banks hunker down for an aggressive growth phase over the next five years.

The Basel III norms, which envisages higher capital requirements, will be implemented in a phased manner from April. They will be implemented fully by March 31, 2018.

According to the final guidelines issued by the Reserve Bank of India last year, domestic banks will need a common equity tier-I capital (core capital) of 5.5 per cent of their risk weighted assets (RWAs) and a 2.5 per cent capital conservation buffer (CCB). Banks will also need to have additional tier-I capital.

The CCB has been introduced to ensure that banks build capital buffers during normal times (outside periods of stress) which can be drawn down as losses are incurred during a stressed period.

SandP said while domestic banks faced a constant need to replenish capital at regular intervals to support their growth, the higher capital requirement under Basel III will increase pressures on them to raise capital and it could also lead to some changes in the industry.

According to SandP, the domestic banking system will be faced with a capital requirement of Rs 3.8 trillion to maintain the core equity ratio of 9.5 per cent.

Tapping markets

The rating agency added that top tier lenders could attain the requirements without the need to lower their risk assets. While these banks find it relatively easier to tap capital markets, the next few years may see other banks also tapping the market to raise capital.

"While we believe some smaller banks may find it difficult to meet the higher capital requirements and at the same time expand their loan books, we think it is unlikely they would face solvency issues. More likely, in our opinion, is that some of these banks could become potential takeover targets, which could result in consolidation in India's currently fragmented banking sector," SandP added.

The State Bank of India will need an equity of Rs 67,700 crore, ICICI Bank Rs 36,100 crore, IDBI Rs 27,200 crore and Bank of India Rs 20,200 crore in an aggressive growth scenario, the report said.

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