Home >Industry >RBI eases tier-1 capital regulations for banks

Mumbai: The Reserve Bank of India (RBI) loosened some rules on Tuesday to bolster banks’ capital, providing state-run banks much-needed additional relief in their battle against bad loans.

RBI allowed some items on the banks’ balance sheets, notably the revaluation reserves linked to their property holdings, to be included in the Tier-1, or core, capital of banks.

This, together with two other relaxations allowed by the central bank, will help shore up the capital of public sector banks by up to 35,000 crore, according to a person familiar with the regulator’s thinking who spoke on condition of anonymity.

That will come on top of the 25,000 crore in capital infusion provided by finance minister Arun Jaitley in his budget for 2016-17, which most analysts saw as inadequate.

Under pressure from RBI, capital-starved public sector banks are battling to clean up their books of bad loans that piled up during an economic downturn which caused projects to stall, squeezed the cash flows of companies and made it difficult for borrowers to repay debt.

“Revaluation reserves arising from change in the carrying amount of a bank’s property consequent upon its revaluation would be considered as common equity tier 1 capital (CET1) instead of Tier 2 capital as hitherto. These would continue to be reckoned at a discount of 55%," RBI said in a statement on Tuesday.

In addition, foreign currency translation reserves which arise out of translation of financial statements of a bank’s foreign operations to the home currency can also now be partly considered as Tier-1 capital.

The same holds for deferred tax assets, part of which will be now counted as Tier-1 capital.

The inclusion of all three items will benefit public sector banks in shoring up capital by as much as 35,000 crore; for private-sector lenders, the benefit would be in excess of more than 5,000 crore, said the person cited above.

Bankers said that this would shore up Tier-I capital in a big way and make it easier for them to meet Basel-III capital norms and International Financial Reporting Standards (IFRS).

Current norms under Basel III require banks to maintain a minimum capital adequacy of 9% and a Tier-I ratio of 7%. Capital adequacy is a measure of a bank’s financial strength, expressed as a ratio of capital to risk-weighted assets.

While all banks have capital in excess of those minimum requirements, some are coming close to the limit. Indian Overseas Bank and United Bank of India have capital adequacy ratios of less than 10%, while 10 other banks have capital adequacy ratio of 10-11%.

India Ratings and Research Pvt. Ltd estimates that banks need a total of 3.7 trillion between fiscal 2017 and 2019 to meet Basel-III norms, of which government infusion should be 1.4 trillion.

The measures announced by RBI on Tuesday will provide some additional comfort. In particular, the revaluation reserves arising out of the changes in the carrying cost of a bank’s property holdings could be significant, as state-owned banks own a lot of the property they use.

“In terms of our real estate holding, the last valuation was done four years ago and we will have to revalue it now," said Anshula Kant, chief financial officer at State Bank of India (SBI), the country’s largest lender.

SBI chairman Arundhati Bhattacharya said on 11 February that the bank has 20,000 crore of real estate.

“This will help in a big way to boost the core capital of banks. In our case, the revaluation reserves reckoned for capital was about 1,500 crore in December," said R.P. Marathe, executive director at Bank of India.

Bank of Baroda’s CET1 will rise by as much as 100 basis points after these relaxations, said P.S. Jayakumar, managing director and chief executive officer at the bank. To avail of this benefit, RBI said banks will have to ensure there are no legal impediments in selling the property, and that revaluations are realistic and done by two independent valuers at least once every three years.

Also, banks must revalue the property “where the value of the property has been substantially impaired by any event", RBI said.

In a report on 2 February, Parag Jariwala, vice-president for institutional research, banking and financial services, at Religare Capital Markets, wrote that “if RBI permits revaluation reserves to be included while calculating tier 1—it will be very positive for PSU banks especially for those who need high amount of capital infusion".

The exact impact would be tough to evaluate and would differ based on how many branches each banks owns and how many it rents, said Jariwala, adding that the regional spread of branches will also make a difference.

While detailing its relaxations on foreign currency translation reserves, the central bank said external auditors should not have raised any concerns on this translation reserve.

Further, deferred tax assets can now be included for up to 10% of a bank’s Tier 1 capital, RBI said.

SBI will be able to include these two items in its capital by March as “it is a simple accounting exercise", said Kant.

Inclusion of foreign currency translation reserves will benefit most the banks that have a large presence globally, in particular SBI and Bank of Baroda.

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