Lenders not worried, say capital conservation is key

Domestic banks will not be as affected as their developed world peers by Basel-III norms and conserving capital will be the key as they look to implement the rules aimed at a stronger financial system, according to bankers and analysts.

“Capital conservation, good ploughback of profits and better dividend management will be the key to strengthen the core capital,” Chennai-based state-run lender Indian Overseas Bank Chairman and Managing Director M Narendra told PTI over the phone after the RBI released draft guidelines on convergence with the system.

Domestic banks are placed better than their foreign counterparts in twin respects, as they already have a healthy capital base —over 6 per cent Tier-I, as mandated by the RBI even before Basel-III — and operate in a region which is on a growth path, he said.

The Reserve Bank came out with draft guidelines for the implementation of the Basel-III framework over the weekend, asking banks to maintain total capital over nine per cent of risk weighted assets (RWAs), including six per cent of core tier-I capital.

The banks have to implement the new rules between January 1, 2013, and March 31, 2017. Following the 2008 global financial crisis, central bankers from across the world formulated a newer set of norms for a healthier financial system, which stresses on higher capital reserves to tide over adversity.

Banks in the developed world are not so well capitalised and it is felt that implementation of Basel-III can impact them, due to which some central banks have opted for phased implementation of the rules.

However, Bank of India Chief Financial Officer Ravi Kumar said the real issue for banks would be reclassification of what constitutes core capital or not as laid out in the draft RBI guidelines. He highlighted the issue of raising capital through hybrid instruments, which would be beyond the realm of Tier I under Basel III.

“The expected growth in the RWAs in line with the economic growth in the context of capital adequacy norms will necessitate banks to mobilise additional capital for growth and solvency,” Deloitte Haskins & Sells India Director Monish Shah said.

Some analysts expect the state-run lenders, which control over 70 per cent of the industry, to have a challenging time with issues of capital management, as their largest shareholder — the government — may have difficulties re-capitalising.

Narendra said newer instruments of capitalising will be used by lenders to meet the tighter capital adequacy requirements. While conceding there would be issues related to capital management, especially for nationalised banks, state-run lender Dena Bank Executive Director Ashok Dutt said the guidelines were on the expected lines.

“Implementation is challenging, but definitely not adverse,” he said.