Thursday, May 03, 2012

Basle III norms a new Headache

Banks may need Rs 2.5 lakh cr to meet Basel III norms: Fitch
Yesterday, another rating agency ICRA said banks will require between Rs 3.9 - 5 lakh crore as capital to comply with Basel-III norms
Press Trust of India / New Delhi May 04, 2012, 20:34 IST

Indian banks may need to raise up to $50 billion (about Rs 2.5 lakh crore) of additional equity under the Basel III capital regulations announced by the RBI on top of retained earnings, a Fitch study said.
"Most of the requirement is back-ended, with over 75% needed to be added between 2015-16 and 2017-18. The additional equity reflects growth capital as well as a buffer above the regulatory minimum," it said
 he guidelines released on May 2, 2012, do not yet provide for a counter-cyclical capital buffer or additional capital for systemically important banks, it said.

Yesterday, another rating agency ICRA said banks will require between Rs 3.9 - 5 lakh crore as capital to comply with Basel-III norms.

Fitch's calculations add half a percentage point of additional common equity to the regulatory minimum, which banks may like to maintain to avoid breaching the conservation buffer - with attendant restrictions on dividends and other payouts.

The immediate impact of the Basel-III capital regime is benign, with the common equity Tier-I ratio for many Indian banks already close to 8% or higher, it said.

However, the shortfall mounts up between 2015-16 and 2017-18, mostly for government banks - with loan growth outpacing internal capital generation, and the minimum capital ratios stepping up, it said.

The largest requirement is by State Bank of India and its associate banks, reflecting their significant share in the banking system; followed by the mid-sized and small government banks with weaker internal capital generation, it said.

The large private banks fare better, due to their higher capital ratios and stronger profitability, it added.

About half of the $40 billion needed by government banks is likely to be injected by the government based on its stated intent of maintaining majority shareholding.

Unless planned, government banks may face the risk of a sudden shortfall in capital during 2005-06, requiring additional support by the sovereign and putting further pressure on government finances.

The need for fresh capital comes at a time when the performance of Indian banks is clearly being affected by the economic slowdown, together with asset-quality pressures from concentrated exposure to infrastructure companies and weak state-owned entities, it added.

We should be prepared for Basel IV in some years

The new Basel III norms announced by the Reserve Bank of India (RBI) on Wednesday will trigger a huge chase for capital by banks. Conservative estimates place the additional capital required at about Rs 1.5 trillion.

Fortunately, the new norms come into effect in a phased manner over January 1, 2013-March 31, 2018, so that banks have a little over five years to find the required capital. That is small consolation, especially for public sector banks (PSBs).

For, while both private and public sector banks will need to tap the market to raise funds, Basel III has wider implications for the latter and, by extension, for taxpayers. The reason is the government is neither willing to relax its stranglehold on PSBs (read, reduce its stake to less than 51% by allowing them to tap the market), nor does it have the funds to infuse capital of this order.

What does that mean for the hapless PSBs? It means they will not be able to keep pace with the credit demands of a growing economy if the government does not budge from its position that it wants to retain majority ownership. In the alternative, PSBs will get the money but at the expense of the hapless taxpayer.

With the fiscal deficit, already at 5.9% of GDP, and inflation, as measured by the consumer price index, still hovering near 9%, that's not a fate we would wish on the people of this country.

The sensible thing for the government to do is to bring down its stake in PSBs to, say, 26% (enough to block a special resolution) while ensuring that shareholding is widely diversified and the RBI, as the banking regulator, remains the final arbiter of who is 'fit-andproper' to hold bank shares in excess of 5%.

The reality is that the best of prudential norms like capital adequacy are only a buffer. They cannot, and will not, eliminate crises brought on by human greed and folly.

So, stringent norms must be backed by an alert regulator, strong and competent supervision and a proper incentive system to rein in the present system that allows banks to privatise profits and socialise losses. Even then, the incidence of frauds and crises can only be reduced, not eliminated in any foolproof manner. So here's Basel III, till the next crisis and Basel IV

Banks need Rs 5 trillion fresh capital to meet Basel norms, says Icra

MUMBAI: Rating agency Icra pegged the incremental equity requirements of banks under the Basel III at around Rs 5 trillion and said banks can manage if they can find investors for the riskier additional tier I capital.

"Banks will need Rs 3.9-5 trillion capital over the next six years, out of which common equity requirements will be Rs 1.3-2 trillion; Rs 1.9 trillion for additional tier I; and Rs 1 trillion for tier II," an Icra note said here today.

This is achievable, "so long as banks can find investors for the riskier additional tier I capital," it noted.

The Reserve Bank yesterday issued final guidelines for Basel III beginning January 1, 2013 and to be implemented by March 31, 2018.

The new norms ask banks to maintain a minimum 5.5 per cent in common equity by March 31, 2015 against 3.6 percent now, apart from creating a capital conservation buffer consisting of common equity of 2.5 percent by March 31,2018.

It also hiked the minimum overall capital adequacy to 11.5 percent by March 31,2018 against 9 percent now.

Noting that around 80 percent of common equity need relates to public sector banks, Icra said of the total equity requirement of the PSBs, the government share would be Rs 0.3-0.8 trillion going by the current policy of government holding 58 percent in its banks.

However, the report notes that if one is to exclude 2007-08, when some large banks took advantage of the buoyancy in the capital market to raise around Rs 0.5 trillion, the equity raised by banks over the 2008-09-2001-12 period was only around Rs 0.5 trillion, out of which around 60 percent was infused by the government or LIC.

"Incremental equity requirement appears manageable, considering past trends in capital mobilisation," the report said, adding "banks raised over Rs 1 trillion in equity during 2007-08 to 2011-12, of which around 54 percent were mobilised by PSBs and 46 percent by private banks."

But, it warned that,"if banks are unable to mop up the required additional tier I and the gap is bridged by raising common equity, incremental equity requirement may go up to a high of Rs 3.2-4 trillion over the next six years out of which Centre's share will be Rs 1.2-1.7 trillion."

The report also notes that while the equity target may appear easy at first glance, it may not prove to be so eventually, given that RBI has also introduced loss-absorption features in the additional tier I capital instruments as these features can very much limit investor appetite for these instruments as it will be difficult to assess the probability of their conversion into equity or of a principal write-down in a stress scenario.

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