Naming those too big to fail

SBI, ICICI named systemically important banks in India and required to maintain higher levels of capital; both rule out need for immediate fund raising

State Bank of India, the country’s largest lender, and ICICI Bank, the second largest, have been identified as systemically important banks (SIBs) by the Reserve Bank of India.

Hence, these two will have to maintain a higher level of capital from April 2016. SBI will have to maintain 0.6 per cent (of risk weighted assets-RWA) additional common equity tier-I (CET1) capital; for privately-owned ICICI Bank, it is 0.2 per cent. “The additional CET1 requirement will be in addition to the capital conservation buffer,” RBI said.

The indicators used to arrive at whether a bank is systemically important or not are size, interconnect, lack of readily available substitutes and complexity. RBI said the selection was based on data collected from banks till March 31, 2015.

SBI’s total assets are a little over Rs 20 lakh crore; ICICI's are close to Rs 6.5 lakh crore. Both entities have several subsidiaries, in areas such as life and general insurance, mutual funds and broking services, among others.

'We're fit'

Both banks indicated they saw no need to raise capital immediately.

"SBI currently has a much higher level of tier-I at 9.62 per cent, as opposed to the seven per cent required under the guidelines,” said Arundhati Bhattacharya, its chief.

"(Our) capital adequacy is well in excess of regulatory requirements and the bank is not expected to require fresh equity capital for the next couple of years," said Chanda Kochhar, managing director and chief executive officer of ICICI Bank.

Where & why

According to an India Ratings report, SBI would need additional capital of Rs 11,400 crore  and ICICI Bank would need Rs 1,440 crore. The agency had made this calculation on the assumption that the RWAs of SBI would grow by 17 per cent yearly and ICICI Bank’s by 20 per cent.  These assumptions were made on credit growth, current ratio and historical growth in RWAs.

“For ICICI Bank, the additional capital needed will not be tough, as their internal accruals will be enough to meet this capital requirement. On the other hand, SBI might need to go to the market to meet this additional capital need but that will not be a challenge for them,” said Kunaey Garg, analyst, India Ratings.

Experts agree that maintaining a higher level of capital will not be a big issue for these banks.

"For the coming quarters, they will have to keep a check on their non-performing assets and also manage their RWAs, which the banks have been doing anyway. So, I don't think that more capital will be a worry." said Shinjini Kumar, leader-banking and capital markets at PwC.

“In case a foreign bank having branch presence in India is a Global Systemically Important Bank (G-SIB), it has to maintain additional CET1 capital surcharge in India as applicable to it as a G-SIB, proportionate to its RWAs in India,” RBI said.

Background

The central bank’s move is in line with the global trend in major economies to identify systemically important banks, a move prompted by the global financial crisis. The crisis erupted in 2008 when some big financial institutions failed, impacting the entire financial system and the real economy.

In November 2011, the Basel Committee on Banking Supervision (BCBS) came out with a framework for identifying such G-SIBs and the magnitude of additional loss absorbency capital requirements applicable to these.

BCBS further required all member countries to have a regulatory framework to deal with Domestic Systemically Important Banks (D-SIBs).

RBI adopted a two-step process for identifying the latter. First, the sample of banks to be assessed was decided, followed by a study to compute their systemic importance. Banks above a designated threshold are to be designated D-SIBs. The selection of banks in the sample is based on analysis of their size as a percentage of gross domestic product.

The computation will be done yearly The names of banks classified as D-SIBs will be disclosed in August every year.