Capital Bill to Accelerate Sharply from FY16; AT1 Market Development Critical-Ind-Ra

India Ratings & Research (Ind-Ra) believes that the government's support stance for its banks was reiterated today through a commitment in the Vote-on-Account to inject INR112bn in FY15. Capital requirements for government banks however need to be planned effectively as these will sharply accelerate FY16 onwards.

Ind-Ra expects the government's contribution to the common equity Tier 1 capital of its banks to total INR1,306bn (USD22bn) over the Basel III implementation period. After the declared injection, Ind-Ra expects government banks' common equity Tier 1 requirements to be INR156bn in FY16, which will increase to INR404bn in FY17. This implies injections equal to about 0.8% and 2.2% of total expenditure for FY16 and FY17, respectively.

The burden on government finances could increase further if the domestic market for Basel III compliant Additional Tier 1 (AT1) instruments does not develop adequately over the next two years. Ind-Ra expects the AT1 requirements of government banks to total INR260bn in FY15 and INR404bn in FY16. Banks would have to either revert to common equity raising or cut growth to meet Basel III requirements if an investor pool for such instruments is found lacking.

Any perceived weakening in the sovereign's support stance would be viewed negatively by markets and could weaken the refinancing capability of select vulnerable mid-to-small government banks.

Other takeaways for banks today included a targeted growth rate in agricultural credit of 14.3% for FY15, similar to the 14.8% growth rate in 2013. Delinquencies rose in this business in FY14; banks expect an improvement now that any expectation of a loan waiver is unlikely to be met.

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