Banks may raise Rs 3-lakh cr in non-core capital by FY17: Icra

Icra said around 40% of the amount raised would be in Tier-II capital bonds, while the remaining would be in additional Tier-I capital bonds

Domestic ratings agency Icra said on Tuesday banks would have to mop up Rs 3-lakh crore in non-equity debt over the next three years as they migrate to the capital intensive Basel-III framework.

"Banks both public and private sector ones, are expected to issue non-equity capital bonds of Rs 2.5-3 trillion (Rs 2.5-3 lakh crore) over the next three years till FY17," it said in a statement.

State-run banks would account for over two-thirds of these bond issuances, while private banks would account for the rest, it said. Around 40 per cent of this amount would be in Tier-II capital bonds, while the remaining 60 per cent would be in additional Tier-I capital bonds, it said.

However, the agency was a bit pessimistic about additional Tier-I bonds, saying that it feared low investor appetite since the newly introduced instrument is riskier.

"Additional Tier-I investors could incur a loss on the coupon if the common equity falls below 8 per cent, and even the principal could be at risk if common equity Tier-I drops below 5.5 per cent," it said.

So far, there has been no issuance of an additional Tier-I instrument by any state-run bank, while Basel-III compliant Tier-II bonds are subscribed to only by a government-run insurer, Vibha Batra, Icra co-head (financial sector) ratings, said.

Banks are required to have 1.5 per cent in additional Tier-I bonds and the requirement of additional Tier-I capital remains very high because they have negligible levels of additional Tier-I at present, the agency said. Batra added that if banks were unable to find takers for these subordinated bonds, they would have to bridge the gap by opting for a higher core Tier-I equity capital.

The total Tier-I capital, including equity and non-equity portions, to be raised by state-run banks in their efforts to be Basel-III compliant would be around Rs 3.9 lakh crore to Rs 4.2 lakh crore.

"In the best case scenario, if they could raise around Rs 1.4 -1.5 trillion (Rs 1.4-1.5 lakh crore) through additional Tier-I and the government brings in its share of Rs 0.8-0.9 trillion (Rs 80,000-90,000 crore), the equity capital required from external sources would come down by around 40 per cent to 50 per cent of their market capitalisation," it said.

On the Tier-II front, state-run banks would have to raise Rs 1.4-1.6 lakh crore until FY19 to replace Basel-II-compliant Tier-II capital with Basel III-compliant instruments, while the same for private banks would stand at around Rs 70,000-80,000 crore, it said.

However, the agency said with banks getting more aggressive about issuances, the country's debt market would be the larger beneficiary, since the amount of money raised is likely to increase by around Rs 4.2-5.1 lakh crore in FY17, up from Rs 2.6 lakh crore in FY14.

It said the recent surge in banking stocks since January has been positive for the banks, since the money to be raised in their efforts to be Basel-III-compliant till FY19 would come down by around 80 per cent to 90 per cent of market capitalisation from around 150 per cent to 170 per cent earlier.