Basel III:Banks may raise Rs 3-trn in non-core capital by FY17

Domestic ratings agency ICRA today said banks would have to mop up Rs 3 trillion (Rs 3 lakh crore) in non-equity debt over the next three years as they migrate to the capital intensive Basel-III framework.
"Banks both public and private sector ones, are expected to issue non-equity capital bonds of Rs 2.5-3 trillion over the next three years till FY17," it said in a statement.
State-run banks would account for over two-thirds of these bond issuances, while private banks would account for the rest, it said.
Around 40 per cent of this amount would be in tier-II capital bonds, while the remaining 60 per cent would be in additional tier-I capital bonds, it said.

However, the agency was a bit pessimistic about additional tier-I bonds, saying that it feared low investor appetite since the newly introduced instrument is riskier.
"Additional tier-I investors could incur a loss on the coupon if the common equity falls below 8 per cent, and even the principal could be at risk if common equity tier-I drops below 5.5 per cent," it said.

So far, there has been no issuance of an additional tier- I instrument by any state-run bank, while Basel-III compliant tier-II bonds are subscribed to only by a government-run insurer, ICRA co-head (financial sector) ratings Vibha Batra said.

Banks are required to have 1.5 per cent in additional tier-I bonds and the requirement of additional tier-I capital remains very high because they have negligible levels of additional tier-I at present, the agency said.
Batra added that if banks were unable to find takers for these subordinated bonds, they would have to bridge the gap by opting for a higher core tier-I equity capital.