Mumbai: The Reserve Bank of India (RBI) on Thursday said it had extended the deadline for Indian banks to meet capital requirements under the so-called Basel III norms by a year to 31 March 2019, offering relief to an industry burdened by bad loans in the face of slower economic growth.
“Of late, industry-wide concerns have been expressed about the potential stresses on the asset quality and consequential impact on the performance/profitability of the banks. This may necessitate some lead time for banks to raise capital within the internationally agreed timeline for full implementation of the Basel III capital regulations,” RBI said in a notification. “This will also align full implementation of Basel III in India closer to the internationally agreed date of 1 January 2019,” RBI said.
Weak economic growth, high interest costs and stalled projects that crimped cash flows have made it difficult for many corporate borrowers to repay their debts, prompting them to seek debt restructuring or default on payments. The economy grew 4.5% in the year to 31 March 2013, and is forecast by the government to expand by less than 5% in the current year.
“This gives breathing space for the banking sector to take care of their growth capital needs given that the industry is current facing difficulties in terms of rise in bad loans,” said M.V. Tanksale, chief executive officer of the Indian Banks’ Association, the industry lobby of banks.
“More time to achieve Basel III requirements means that the capital burden of banks, both in terms of bad loan provisioning and mandatory capital requirements, will be eased a bit. Hopefully, within the extended timeframe, the banking industry will get over the asset quality worries too,” Tanksale said.
In September 2012, then RBI governor D. Subbarao said the banking sector would need around Rs.5 trillion of capital to meet Basel III norms, of which equity capital would be Rs.1.75 trillion. Of this, between Rs.70,000 crore and Rs.1 trillion can be raised from the market.
The Congress-led United Progressive Alliance government has been struggling to fund state-run banks, which control two-thirds of the assets in India’s Rs.83 trillion banking sector. The government has plans to infuse Rs.11,200 crore in state-run banks in fiscal 2015, less than the Rs.14,000 crore it infused in the previous fiscal. This capital infusion is nearly half of what is needed by the sector to meet the Basel III requirements, according to expert estimates.
According to the 2012 estimate of Subbarao, if the government opts to maintain its shareholding at the current level, the burden of recapitalization will be of the order of Rs.90,000 crore in five years, but if it decides to reduce its shareholding in every bank to a minimum of 51%, the burden will come down to less than Rs.70,000 crore.
Under Basel III norms, being implemented in phases between April 2013 and March 2018, banks need to have a core capital ratio of 8% and a total capital adequacy ratio of 11.5% against 9% now. Capital adequacy is a measure of a bank’s financial strength expressed as a ratio of capital to risk-weighted assets.
Indian banks’ problems have been compounded by the rise in bad loans. The gross bad loans of Indian banks rose to Rs.2.4 trillion in the December quarter, up 36% from a year ago. The combination of bad and restructured loans—termed as stressed assets—roughly accounts for around 11% of total loans.
Higher bad loans hurt the profitability of banks as they need to set aside more money to cover such loans in the form of loan provisions and, in turn, push up their capital needs.
Banks need to improve their risk management systems to check the rise in stressed assets, experts said.
“The single most important priority for Indian banks should be to put in place an adequate risk management system and even more importantly to find ways to address the issues pertaining to the restructured loan portfolio,” said Saurabh Tripathi, a partner and director at Boston Consulting Group.
According to a 6 March report by Kotak Institutional Equities, public sector banks would need another $17 billion (around Rs.1.02 trillion) to comply with Basel III requirements between fiscal 2015 and fiscal 2018.
“The government of India and Life Insurance Corporation of India have been committed to infusing capital, but their stakes have been rising sharply, which could make it challenging for these banks to raise capital,” Kotak said, adding that a reduction in the dividend payout and a sharp slowdown in loan growth could be alternative ways to achieve this.
Sushil Muhnot, chairman and managing director of Bank of Maharashtra, said an improvement in the economy and the removal of policy bottlenecks would eventually help ease the bad loan woes of banks. “Given that context, additional time to achieve Basel III (rules) is a relief to the sector, especially when the whole industry is affected by asset quality issues,” he said.