'Indian banks will need more equity for Basel III'

With four years left for the implementation of Basel- III norms, banks in India would have to gear up for the phased transition from the next financial year. While the overall adaptation of new norms would not be difficult, some banks in India may face hurdles in meeting capital requirements, said Reserve Bank of India (RBI) Deputy Governor Anand Sinha.

In March, the average tier-I capital ratio of Indian banks was a little above nine per cent. However, going forward, there would be a need for more equity. “This huge need for equity capital by banks would have to be managed, and in the case of state-owned banks, the government would have to find resources to capitalise them,” Sinha said, while addressing an event on Wednesday. He added the additional capital requirement for the banking sector had not been finalised yet, though private sector banks have reported their estimates to the regulator.

Sinha said RBI was working towards tweaking liquidity norms to suit the Basel-III requirements. Currently, banks in India are mandated to maintain 24 per cent of their net demand and time liabilities as the statutory liquidity ratio (SLR). “In the central bank, our view is asking banks to maintain more liquid assets besides SLR would put them in a competitively disadvantageous position. Therefore, we are considering to what extent SLR should be reckoned for Basel-III requirements,” Sinha said.

In terms of asset quality, Sinha said further deterioration was expected, but added there was no systemic concern. He said the retail segment was also likely to feel the pressure, owing to a rise in interest rates. The banking industry is already reeling from rising non-performing assets, owing to exposure to other sectors like infrastructure and real estate.

The central bank has raised policy rate by 325 basis points in 11 tranches since March 2010, including two strong increases of 50 basis points each this financial year. Sinha said past rate rises had started impacting consumer demand. “In fact, the investment has become subdued, but the consumer demand was high or strong. Currently, it seems the interest rate rise has started having an impact,” he said.