Basel II to hit banks' capital

The capital adequacy of banks will fall by 50 basis points in 2007-08 and by as much as 75 basis points each in the second and third year, after adopting the new capital adequacy norms.

There would be a severe strain on capital due to the implementation of Basel II norms, according to bankers. The impact will however be spread over 3 years. The banks will have to adopt the new capital provisioning norms under Basel II with effect from March 2008.

Vishakha Mulye, group chief financial officer, ICICI Bank said, "This year, there will be a 40-50 basis points impact on capital adequacy of the bank."

A major cause for the reduction in the capital adequacy would be the introduction of capital charges for operational risks. The impact would have been about three times higher, if the central bank had not deferred the introduction of risk weights on unrated corporates, said bankers.

The central bank had earlier prescribed a risk weight of 150 per cent on unrated corporate loans over Rs 10 crore, from March 31, 2007.

Under the revised framework, the RBI has mandated higher capital requirements for unrated corporate borrowers in a phased manner.

For 2008-09, the incremental corporate exposures over Rs 50 would attract a higher risk weight of 150 per cent. From April 1, 2009, the applicable threshold would be Rs 10 crore.

"The central bank has deferred the impact of providing higher capital for unrated corporate claims in excess of Rs 10 crore by almost 2 years. It would have meant an additional impact of 1-1.5 per cent. For 2008-09, the reduction would be 75 basis points as loans above Rs 50 crore are also considerable," said a senior official of a large public sector bank.

The banks had been clamouring for a phased implementation of risk weights on unrated corporates as these loans form a major component of outstanding loans. Around 15 per cent of Bank of India's loan book comprises corporate loans in excess of Rs 10 crore, said a banking source.

A study by Crisil had estimated the decline in overall capital adequacy at 1.6 per cent, going by the March 2004 levels. With the adoption of the revised capital adequacy framework, the impact could be around 2 per cent.

The foreign banks and Indian banks with international operations will have to adopt the new capital adequacy framework from March 31, 2008.