Increased capital requirements under Basel III to add to risk on bank books: Fitch
Fitch said that govt-owned public sector banks are the most at risk, given their poor existing capital buffers and weak prospects for raising capital through market channels
Mumbai: The Reserve Bank of India’s (RBI) increased capital requirements under Basel III are likely to put nearly half of Indian banks in danger of breaching capital triggers, international rating agency Fitch Ratings said in a report on Monday.
Government-owned public sector banks are the most at risk, given their poor existing capital buffers and weak prospects for raising capital through market channels, Fitch said.
“Our analysis of 27 Indian banks with outstanding hybrid capital instruments indicates that at end-June 2016 the total capital adequacy ratio (CAR) for 11 banks was at or lower than the minimum of 11.5% required by end-March 2019 (FYE19),” Fitch said in its report.
Of the 11, six did not have enough capital to meet the minimum required 10.25% by 31 March 2017. The minimum total CAR is a prerequisite for payment of coupons on both legacy and Basel III perpetual debt capital instruments.
For Basel III perpetual instruments, coupon deferral is also linked to banks meeting both minimum regulatory common equity tier 1 (CET1) ratio and Tier 1 ratio. More than half of the banks currently have a CET1 ratio that is below the required 8% minimum that will be applied from FYE19, the rating agency said.
Recently, large state-owned lenders like State Bank of India (SBI), IDBI Bank and Union Bank of India have announced additional Tier-1 (AT-1) fund raising worth Rs.2,100 crore, Rs.1,500 crore and Rs.1,000 crore, respectively. SBI also intends to hit the international market to raise up to $1 billion in at least two tranches, Mint had reported on 7 September.
Fitch estimates that Indian banks will require around $90 billion in new capital by FY19 to meet Basel III standards, with the state banks accounting for about 80% of the total. Meeting IFRS 9 (international financial reporting standards 9) accounting requirements could add to the challenges faced by the banks. The government has already earmarked Rs.70,000 crore ($10.4 billion) for capital injections into state banks through to FY19 and in July it announced that Rs.22,900 crore ($3.4 billion) was being front loaded.
Priority is being given to banks most in need of new capital, but the capital injections may not be sufficient to address their ongoing capital needs to meet required provisions and to support balance sheet growth.
“However, we believe that more capital will be needed from the government to restore market confidence,” the Fitch report noted.
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