Indian banks need Rs 8-lakh crore by 2019: Crisil

Indian banks would require additional Rs 8 lakh crore to meet the minimum capital adequacy under Basel III norms, ratings agency Crisil has said. The amount is over and above their earnings in the transition period between 2013 and 2019.

According to the Basel III guidelines released in 2010, banks across the globe would need a minimum capital adequacy ratio of 10.5 per cent, which includes seven per cent of core equity, 1.5 per cent of non-equity Tier-I capital and two per cent of Tier-II capital. The countercyclical buffer of up to 2.5 per cent would increase the total capital requirement to 13 per cent.

“Indian banks are well capitalised and would be able to meet the leverage and liquidity requirements under Basel III,” said Pawan Agarwal, director (corporate and government ratings), Crisil. According to evaluation by the ratings agency, the overall capital adequacy ratio of Indian banks, on an average, was 14.1 per cent as on March 31. The Reserve Bank of India is expected to issue draft guidelines by December.

Assuming the government maintains 51 per cent stake and bank credit grows around 20 per cent every year, around Rs 6 lakh crore would be required, which includes Tier-I capital of Rs 3.5 lakh crore in public sector banks.

The challenge, however, is to replace existing hybrid instruments worth Rs 1.25 lakh crore, a part of Tier-I capital, with those permitted under Basel-III norms. The new standards would allow hybrid instruments such as Tier-I perpetual bonds and upper Tier-II bonds with a 'write off' clause that enables automatic conversion into equity, when required. “Lack of adequate appetite may lead to higher premium for new instruments,” said Agarwal.

Crisil said while new measures would strengthen Indian banks, their profitability is likely to be hit, given the higher core equity capital and liquidity requirements. The ratings agency estimates the return on equity would decline by around two-three per cent for banks with low core capital. While rating banks, there would be an increased focus on their capability to raise the required capital.