The Reserve Bank of India (RBI)'s guidelines on Basel-III capital regulations are unlikely to make domestic lenders scramble for funds, at least in the near term, say industry analysts and bankers.
“There is no desperation among Indian banks to raise capital,” said Rohit Bammi, partner, financial risk management at KPMG in India. “Most banks are well capitalised and do not have any immediate need for funds. Also, the banking story in India is still attractive for investors. This strengthens banks’ ability to access markets. So, even if they need to raise capital over the medium term due to growth in their businesses, there will not be any shortage of funds.”
The new norms mandate Indian banks need to maintain a minimum capital adequacy ratio (CAR) of nine per cent, in addition to a capital conservation buffer, which will be in the form of common equity at 2.5 per cent of the risk weighted assets.
In other words, banks’ minimum CAR must be 11.5 per cent. Indian banks are currently required to have CAR of at least nine per cent.
RBI said the common equity in tier-I capital must be 5.5 per cent of risk weighted assets and the minimum tier-I CAR must be seven per cent, instead of six. The new rules will come into effect from January 2013 and banks will have to implement these by March 2018.
Industry analysts say meeting the norms will not pose a significant challenge for domestic lenders.
“The additional capital is required in a phased manner. Hence, it will not be too disruptive for the market,” Robin Roy, associate director-financial services at Pricewater-houseCoopers in India, said.
Even RBI noted that capital requirement for banks would be lower in the initial years. It said the leverage ratio of banks must not fall below 4.5 per cent. In its draft norms, RBI had proposed the minimum leverage ratio at five per cent. Currently, the average leverage ratio of commercial banks is estimated to be over five per cent.
While top private banks in the country have no immediate plans to raise funds due to their superior CARs, small and mid-sized lenders are waiting for the market to improve before knocking at investors’ doors for additional capital.
“Our capital adequacy ratio is comfortable and we have sufficient common equity in our tier-I capital,” managing director (MD) and chief executive of Catholic Syrian Bank, V P Iswardas, said.
“Hence, there is no urgency to raise funds. We will decide on funding as and when the market improves based on our requirements,” he added. The private lender’s CAR stands at around 11.5 per cent.
Bankers say investors are bullish on Indian private banks. Hence, capital will not be a constraint for these lenders.
“In the last few weeks,” said a senior executive of YES Bank, “Rabobank sold a part of its stake in our bank. They did not have trouble in finding an investor. Then why should we have any problem.”
DCB Bank recently raised Rs 94 crore of tier-I capital through qualified institutional placement. In addition, the bank’s board approved preferential allotment of Rs 98.75 crore.
“I don’t think we will raise capital for the next two to two-and-a-half years,” Murali M Natrajan, MD and chief executive of DCB Bank, said.
Industry analysts say even state-run banks will not face any difficulty in attracting investors for their capital requirements. But it will be a challenge for the government to maintain its majority stake in these banks through fresh capital infusion.
“While there will be no dearth of private investors, the government also needs to contribute towards capitalisation of public sector banks to maintain its stake. Given the state of its finances, it could be a challenge,” said an analyst requesting anonymity.
Ratings agency CRISIL estimates banks (public and private sector) will need to raise around Rs 2.7 lakh crore to meet the new capital norms.
