Fitch puts a number to banks' capital

Total amount needed pegged at Rs 2.7 lakh crore; largest requirement by SBI and associates; govt needs to plan ahead for injection

Indian banks may need to raise up to $50 billion (Rs 2.7 lakh crore) of additional equity under the Basel-III capital regulations announced by the Reserve Bank of India, on top of retained earnings, according to Fitch Ratings.

Most of the requirement is back-ended, with a little over 75 per cent needed to be added between FY16 (financial year ended March 2016) and FY18, according to a statement by the rating agency. The additional equity reflected growth capital and a buffer above the regulatory minimum, said Fitch.

The guidelines released on May 2 do not yet provide for a counter-cyclical capital buffer or additional capital for systemically important banks. Fitch’s calculations add half a percentage point of additional common equity to the regulatory minimum, which banks mighty like to maintain to avoid breaching the conservation buffer, with attendant restrictions on dividends and other payouts.

The immediate impact of the Basel-III capital regime is benign, with the common equity Tier-1 ratio for many Indian banks already close to eight per cent or higher, stated the agency. However, the shortfall mounted between FY16 and FY18, mostly for government-led banks, with loan growth outpacing internal capital generation and the minimum capital ratios stepping up.

The largest requirement is by State Bank of India and its associate banks, reflecting their significant share in the system; followed by the mid-sized and small government banks, with weaker internal capital generation, Fitch has said. The large private banks fare better, due to their higher capital ratios and stronger profitability, it said.

About half the $40 bn (Rs 2.13 lakh crore) needed by government banks is likely to be injected by the government, based on its stated intent of maintaining majority shareholding. Government’s support has been boosted since 2008 and it has budgeted for a $2.5 bn (Rs 1,337 crore) injection of equity in FY13. The requirement will accelerate in FY16 and needs to be planned, the statement said.

The remaining equity of up to $20 bn (Rs 1.06 lakh crore), said the rating agency, that may need to be raised from the markets represents a significant addition for the banks. To put this in perspective, Indian banks raised only about $2.5 bn of common equity from the markets in FY11 and FY12 combined.

Unless planned, it said, government banks may face the risk of a sudden shortfall in capital during FY16, requiring additional support by the sovereign and putting further pressure on government finances.

The need for fresh capital comes at a time when the performance of Indian banks is clearly being affected by the economic slowdown, together with asset-quality pressures from concentrated exposure to infrastructure companies and weak state-owned entities, according to the statement.

The viability ratings (the standalone financial ratings) of some government banks mighty be downgraded unless these pressures ease, though their Issuer Default Ratings should remain unaffected at the Support Rating Floor, due to expectations of continued support from the government, it added.