Many Indian banks risk breaching Basel III capital triggers: Fitch

Ratings agency Fitch has said that the progressive increase in minimum capital requirements under Basel III is likely to put nearly half of Indian banks in danger of breaching capital triggers.

Public sector banks are the most at risk, given their poor existing capital buffers and weak prospects for raising capital through market channels.

"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 per cent required by end-March 2019 (FYE19). Of these, six did not have enough capital to meet the minimum required by FYE17," Fitch said in a statement.

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 per cent minimum that will be applied from FYE19.

Fitch estimates that Indian banks will require around $90 billion in new capital by FYE19 to meet Basel III standards. The state banks account for about 80 per cent of the total.

Meeting international Financial Reporting Standards accounting norms 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 FYE19. In July, it announced that Rs 22,900 crore ($3.4 billion) was being frontloaded in the current financial year.

Priority is being given to the 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, more capital will be needed from the government to restore market confidence.

As it stands, state banks are heavily reliant on the government for new capital. Sharply deteriorating financial profiles have raised the standalone credit risks of state banks over the last year.

Equity valuations have suffered as a result. Most continue to trade at heavy discounts to their book value, which acts as a significant constraint on raising new core equity, it said.