Extension in the timeline for implementation of the last tranche of capital conservation buffer (CCB) can reduce the burden of public sector banks (PSBs) this financial year by Rs 350 billion, a report said Tuesday.
After a board meet on Monday, the RBI had decided to extend implementation of the CCB norm of 0.625 per cent of risk-weighted assets (RWA) by a year to March 2020.
"This will provide some breathing space to capital-starved PSBs," domestic rating agency Crisil's senior director, Krishnan Sitaraman, said.
The agency also revised down its capital requirement estimate during the financial year to Rs 850 billion, from the earlier Rs 1.2 trillion.
It explained that CCB was introduced in 2008 as a capital buffer that banks have to accumulate in normal times to be used for offsetting losses during periods of stress.
As on September 30, banks had to maintain tier-I capital adequacy ratio (CAR) including CCB of 8.875 per cent (7 per cent tier I CAR + 1.875 per cent CCB). The CCB portion was to have been further increased by 0.625 per cent by March 2019, which will now be deferred by a year.
However, despite the revision down in the quantum of capital required, the government will have to arrange a bulk of the Rs 850 billion requirement, he said.
"That's because, hobbled by legacy stressed assets and weak performance on profitability, PSBs have little ability to tap the capital market," he said.
Over Rs 1.12 trillion in capital has been infused into PSBs since April 2017 and another Rs 990 billion needs to be raised by March 2019, of which Rs 530 billion is scheduled as equity to be infused by the government, it said.
The agency reiterated that a bulk of the additional capital is required for PSBs under the prompt corrective action (PCA) framework of the RBI. As of September 30, 2018, 13 out of 21 PSBs mainly the PCA banks had tier-I capital adequacy ratios (including CCB) below regulatory norms or less than 8.875 per cent.
It is becoming "onerous" for PSBs to meet the minimum capital requirement amid weak profitability and depleting capital cushion over the regulatory minimum, it said, adding that the PCA lenders have had to recall additional tier-I bonds, which has impacted their capital adequacy.
"In this milieu, the deferral of implementation of last tranche of the CCB will be a relief for PSBs," it said.