Mumbai: The banking sector may require up to Rs89,000 crore of capital towards incremental provisioning for advances while transitioning to new accounting standards, says a report released by India Ratings on Wednesday.
The provisioning required for migration to Indian Accounting Standards, or IndAS, along with asset quality overhang and transition to Basel III norms, would result in a spike in capital consumption by banks, especially public sector lenders.
“Of the Rs89,000 crore, public sector banks would need Rs63,100 crore, which is equivalent to an equity write-down of 1.10% of the banks’ risk weighted assets and 11.5% of net worth at end-March 2017," India Ratings said in the note. Private sector banks would Rs25,800 crore, but their higher capitalization would enable a smooth transition, it said.
The estimates are based on assumption of a lifetime probability of default of 15% and 100% for stage 2 and stage 3 assets, respectively. The rating agency expects a possible blended haircut of around 50% across stressed assets.
In October, the government said announced a Rs1.53 trillion bank recapitalisation plan for state-run banks. If IndAS is implemented from 1 April (the current deadline for banks and non-banking financial companies to adopt the new norms) close to 41% of the announced bank recapitalisation funds would be consumed in incremental provisioning requirements, the report said.