Mumbai: Rating agency Icra on Thursday pegged the incremental equity requirements of banks under the Basel III at around Rs 5 trillion and said banks can manage if they can find investors for the riskier additional tier I capital.
"Banks will need Rs 3.9-5 trillion capital over the next six years, out of which common equity requirements will be Rs 1.3-2 trillion; Rs 1.9 trillion for additional tier I; and Rs 1 trillion for tier II," an Icra note said here on Thursday.
This is achievable, "so long as banks can find investors for the riskier additional tier I capital," it noted.
The Reserve Bank yesterday issued final guidelines for Basel III beginning January 1, 2013 and to be implemented by March 31, 2018.
The new norms ask banks to maintain a minimum 5.5 percent in common equity by March 31, 2015 against 3.6 percent now, apart from creating a capital conservation buffer consisting of common equity of 2.5 percent by March 31,2018.
It also hiked the minimum overall capital adequacy to 11.5 percent by March 31,2018 against 9 percent now.
Noting that around 80 percent of common equity need relates to public sector banks, Icra said of the total equity requirement of the PSBs, the government share would be Rs 0.3-0.8 trillion going by the current policy of government holding 58 percent in its banks.
However, the report notes that if one is to exclude 2007-08, when some large banks took advantage of the buoyancy in the capital market to raise around Rs 0.5 trillion, the equity raised by banks over the 2008-09-2001-12 period was only around Rs 0.5 trillion, out of which around 60 percent was infused by the government or LIC.
"Incremental equity requirement appears manageable, considering past trends in capital mobilisation," the report said, adding "banks raised over Rs 1 trillion in equity during 2007-08 to 2011-12, of which around 54 percent were mobilised by PSBs and 46 percent by private banks."
But, it warned that,"if banks are unable to mop up the required additional tier I and the gap is bridged by raising common equity, incremental equity requirement may go up to a high of Rs 3.2-4 trillion over the next six years out of which Centre's share will be Rs 1.2-1.7 trillion."
The report also notes that while the equity target may appear easy at first glance, it may not prove to be so eventually, given that RBI has also introduced loss-absorption features in the additional tier I capital instruments as these features can very much limit investor appetite for these instruments as it will be difficult to assess the probability of their conversion into equity or of a principal write-down in a stress scenario.

Noting that higher core capital will help improve credit ratings, Icra said, "excess additional capital will ensure a minimum 70 percent core capital level, while limiting tier II to just 17 percent. Higher capital and the improved quality of capital, will be a credit positive for banks".
"When banks with low core tier-I shore up their capital to around 9 percent, their return on equity could drop by 1-4 percent, which they could seek to compensate by raising their lending yields, increasing fee income, or rationalizing costs," Icra said, adding as of December 2011, 15 PSBs had less than 8 percent core tier I capital and eight had under 7 percent and the latter will have to take a knock on their RoE.
When it comes to private players, Icra notes since most of them are already well-capitalised, transition to Basel III may not impact their earnings significantly.
"In fact, private banks competitive position can improve when PSBs raise their lending yields. But, at the same time, the upside potential for private banks can be limited by the higher minimum core capital requirement," says the report.
Explaining the scenario, it said if a bank with a 7 percent core tier I and a 15 percent RoE targets 9 percent core capital, it can end up reporting an RoE of 12.5 percent in case there is no change in lending yields.



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