Banks need Rs 1.4 trillion in non-equity core capital: Crisil

Crisil today said banks will find it a bit difficult to raise Rs 1.4 trillion in non-equity based core capital to meet Basel III norms, as it could be hard to convince investors about the safety of these hybrid instruments.

The domestic banks will need to raise Rs 2.7 trillion by March 2018 to meet tier-I capital requirements under Basel III. The tier-I capital consists of two components: a minimum of Rs 1.3 trillion as equity capital and up to Rs 1.4 trillion as non-equity tier-I capital, the agency said.

"Banks -- public and private sector together -- will have to raise Rs 1.4 trillion in non-equity core (tier I) capital to meet the Basel III requirements, over the next five years beginning April.

"However, unlike equity-capital, they will find it difficult to mop up the non-equity-based core capital worth Rs 1.4 trillion due to the complex nature of these debt instruments as they have many underlying risks," Crisil Ratings President Ramraj Pai told reporters in a conference call on the implications of Basel III norms here today.

Pai said Crisil believes that while the 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.

"Therefore, Crisil believes it is critical to develop bond markets to help banks raise the non-equity capital component. Moreover, banks will need to focus on conserving capital under Basel III," he said.

But according to RBI, both public and private banks together need an additional capital of Rs 5 trillion to comply with the Basel III (equity capital of around Rs 1.75 trillion and non-equity capital of Rs 3.25 trillion).

Crisil Ratings Senior Director Pawan Agrawal said the most important challenge will be building investor confidence in the efficacy of these instruments.

"These instruments will carry higher risks, given their equity-like features such as discretion on coupon payments, and the likelihood of coupon non-payment and principal loss if a bank's equity capital falls below prespecified thresholds.

"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. Nevertheless, non-equity tier-I capital will still be cheaper than equity capital," he said.