The incremental equity requirement due to enhanced Basel III capital ratios is expected to be Rs 75,000 crore-80,000 crore by end-March 2018 for public sector banks, according to a Reserve Bank of India (RBI) report, “Trend and Progress of Banking in India in 2011-12”.
Basel III is the global regulatory standard on bank capital adequacy, stress testing and market liquidity risk. These standards were agreed upon by the members of the Basel Committee on Banking Supervision in FY11 to be introduced in 2013 until 2018.
According to the report, major private sector banks would require common equity of Rs 20,000 crore-25,000 crore on top of internal accruals, in addition to Rs 50,000 crore-60,000 crore in the form of non-equity capital.
The RBI said that these projections are based on the conservative assumption of uniform growth in risk-weighted assets of 20 per cent per annum individually for all banks, and individual bank’s assessment of internal accruals (in the range of 1.0-1.2 per cent of risk-weighted assets).
For every bank, it is critical to work out the most cost-effective model for implementing Basel III. According to the RBI, banks will have to issue fresh capital particularly towards the later years of implementation.
“Although Indian banks have the advantage of a strong starting base in the form of a higher capital to risk-weighted assets ratio (CRAR) with a larger component of core equity capital, the large equity needs, although over an extended time-frame, could put downward pressure on the banks’ return on equity (RoE),” the report said.
The report added that in the long term, higher capital requirements would bring down risks in the banking sector, inducing investors to accept a lower RoE. While in the short-term, the only solution is to raise productivity. The government being the owner, public sector banks will have to play a proactive role in this process, the report noted.
Basel III gains importance because effective implementation of it is needed for developing the resilience of the banking sector to future shocks.
“The current capital adequacy levels for the Indian banking system are comfortable. However, the capital requirements, including equity, would be substantial to support the high GDP growth,” the report said.