Indian banks will require about $65 billion in additional capital, lower than estimated earlier, to meet the Basel III capital adequacy norms by March 2019 and push loan growth, according to a US-based rating agency.
Weak capital positions have a major negative influence on the banks’ viability ratings, which will come under more pressure if the problem is not addressed, Fitch Ratings said on Tuesday. “Indian banks are likely to require around $65 billion of additional capital to meet new Basel III capital standards that will be fully implemented by the financial year ending March 2019,” Fitch said.
This is lower than the credit rating agency’s previous estimate of $90 billion, largely as a result of asset rationalisation and weaker-than-expected loan growth.
State-owned banks – which account for 95 per cent of the estimated shortage – have limited options to raise the capital they still require, it said. “Prospects for internal capital generation are weak and low investor confidence impedes access to the equity capital market,” Fitch said, adding they are likely to be dependent on the state to meet core capital requirements.
The government is committed to investing only another $3 billion in fresh equity for 21 PSBs over the current and the next financial year, having already provided most of the originally budgeted $11 billion.
“Fitch believes the government will have to pump in more than double, even on a bare minimum basis, if it is to raise loan growth, address weak provision cover, and aid in effective NPL resolution,” it said.
The gross non-performing loan (NPL) ratio reached 9.7 per cent in 2016-17, up from 7.8 per cent in 2015-16. The NPL resolution process being led by RBI could potentially release capital if recovery rates are as high as banks and the government are hoping for.
There are 12 currently going through resolution, representing 25 per cent of total system NPLs, and the RBI has recently released a list of 50 more accounts that banks have been directed to resolve within three months or push into the insolvency process. “State banks are unlikely to be freed from their current gridlock unless NPL resolution is accompanied by additional capital,” Fitch said.
Private sector lenders, in contrast, are relatively well-placed despite some pressure on core capitalisation due to deterioration in asset quality.
Favourable trend in additional tier 1 (AT1) issuances and market pricing suggests that the government will try to help lenders avoid missing coupon payment.
Recently, IDBI Bank was allowed to make coupon payments on AT1 debts even through it was unable to meet the capital conservation buffer (CCB) requirement. Such exceptions are believed to cause a 50 per cent drop in capital requirement if lenders are exempted from meeting CCB and counter cyclical buffer, Fitch report believes. In fact, such reassurances held risk premiums within a tight band while allowing lenders continue accessing AT1 debt. This trend even allowed private lenders to make frequent market visits despite some are likely to skip coupon payment amid healthy positions.
Eight lenders raised Rs 18,300 crore ($2.9 billion) via AT1 issuance during April-August compared with Rs 4,800 crore by four lenders over the same period last year. Further issuance is likely, while forbearance coupled with significant domestic liquidity after demonetisation continues to support investor appetite.
Basel III is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision and risk management within the banking sector. The Basel committee on banking supervision published the first version of Basel III in 2009, giving banks approximately three years to satisfy all requirements. Largely in response to the credit crisis, banks are required to maintain proper leverage ratios and meet certain minimum capital requirements.
Basel III is part of the continuous effort to enhance the banking regulatory framework. It builds on the Basel I and Basel II documents, and seeks to improve the banking sector’s ability to deal with financial stress, improve risk management, and strengthen the banks’ transparency.
(With input from agencies)