Banks may see capital plunge post-Basel II

Commercial banks are likely to see a drastic reduction in their capital with the implementation of the stringent Basel II norms in 2006.

Banking analysts expect two-three per cent of their capital adequacy ratios (CAR) to be shaved off under the new norms.

The Reserve Bank of India (RBI) has announced that banks will have to adopt the 'standardised approach' for credit risk and 'basic indicator approach' for operational risk with effect from March 31, 2007. While several banks have done the needful with public issues, others will also have to tap the markets soon.

The average CAR across banks stands at about 12.9 per cent. Take away a conservative 2.5 per cent, and banks are left with just 10.40 per cent. As per the present RBI norms, a bank will not be able to freely declare dividends once its CAR falls below 11 per cent. Once the level falls below nine per cent, it is not viewed as unhealthy.

The provisioing requirements on market risk and operational risk will shoot up, especially since the operational risk was never on the radar of Indian bankers till date.

"But on the credit side we expect the requirements to come down since the one size fits all rule will no longer exist. So banks with good quality assets will need lesser provisioning," said the treasury head of a public sector bank.

Private sector majors claim that Basel II norms will have a minimal impact on their CARs. The largest private bank, ICICI Bank, claims the norms will shave off less than 0.50 per cent from its CAR of 13.5 per cent.

Said Paresh Sukthankar, head, credit and market risk, HDFC Bank, "The norms will have no major impact on HDFC Bank's CAR since the bank has a good business mix and the quality of the portfolio also exhibits high standards," he said.

HDFC Bank, which recently raised around $300 million via an American depository receipts issue to raise its CAR to 12 per cent, says it needs no fresh capital to comply with Basel II.

Rating agency Icra estimates that given the asset growth and the corresponding increase in provisioning requirements, banks would need to raise Rs 18,000-20,000 crore over the medium term.

But in the shorter term, ICRA believes Indian banks would need additional capital to the extent of about Rs 11,900 crore to meet the capital charge requirement for operational risk under Basel II.

Most of this capital would be required by public sector banks at about Rs 9,000 crore, followed by the new private sector banks at Rs 1,100 crore and the old generation private sector banks at Rs 750 crore.