Banks need Rs 5 lakh cr to meet Basel-III norms

Indian banks would need about Rs 5 lakh crore of additional capital to meet the Basel-III norms, the Reserve Bank of India (RBI) said in its annual report for 2011-12. State-run banks would need a majority of these funds — Rs 1.4-1.5 lakh crore of common equity and Rs 2.65-2.75 lakh crore of non-equity capital.

As majority shareholder in the public sector banks, the Centre would have to infuse a significant amount if it wants to retain its 58 per cent stake — the government’s stated policy.

Private sector banks would need Rs 70,000-85,000 crore to meet the new capital adequacy norms. Of this, Rs 20,000-25,000 crore would be common equity. RBI said these projections were based on a conservative assumption of uniform annual growth of 20 per cent in risk-weighted assets for each bank. The central bank also factored in lenders’ assessment of their internal accruals.

“There have been some arguments on whether the regulatory regime could be softer for public sector banks, given the backstop they enjoy with the government, the principal owner and stakeholder in such banks. However, from the regulatory standpoint, operating on the basis of such backstops, not on the basis of prudential standards, would be detrimental to the financial system. It would also be unethical,” RBI said. It added it was committed to developing a “level playing regime” for all banks, irrespective of their ownership patterns.

Concern was raised on whether the Centre might find it difficult to capitalise public sector banks, owing to the widening fiscal deficit. Recently, RBI Governor D Subbarao had expressed doubts on whether the government could infuse this amount of capital.

“There will be alternatives before the government---either reduce shareholding to 50 per cent or slow their growth….Given the constraints arising from the fiscal deficit, it would be difficult for the government to infuse additional capital at this level into the public sector banks on its own,” Subbarao had said.

Though RBI said implementation of Basel-III norms would be “challenging”, it added the process would be “manageable”. It argued even if Basel-III norms weren’t proposed, banks would still require additional capital to meet Basel-II norms. For public sector banks, the incremental equity requirement, according to Basel-III norms, was Rs 75,000-80,000 crore, it said.

According to Basel-III norms, Indian banks have to maintain a capital adequacy ratio of at least nine per cent, in addition to a capital conservation buffer, which would be in the form of common equity of 2.5 per cent of risk-weighted assets. In other words, banks’ minimum capital adequacy ratio should be 11.5 per cent. Currently, Indian banks have to maintain a capital adequacy ratio of at least nine per cent.

RBI also said the common equity in Tier-I capital must be 5.5 per cent of risk-weighted assets and the minimum Tier-I capital adequacy ratio must be seven per cent, instead of six per cent. The new rules will come into effect from January 2013, and banks will have to implement these by March 2018.