It has been reported that State Bank of India (SBI) and its associates and subsidiaries (SBI group) will require around Rs 1 lakh crore over the next five years to meet Basel-III norms. The estimate of this capital requirement is based on a 20 per cent growth rate and a return on equity of between 18 and 20 per cent. The banking regulator has estimated that Indian banks will need about Rs 5 lakh crore in the next five years to get ready for Basel-III norms. These norms, developed against the backdrop of the 2008 crisis, impose higher capital prescriptions on banks to cope with various risks.
Given the public sector character of the banking system in India, will our banks, especially the public sector ones, be able to meet the requirement? The answer is a big “no”. The Street has understood this prominent weakness of public sector banks and has valued them much below private sector banks. For example, when HDFC Bank – a new-age private bank that has about a quarter of SBI’s assets – nudged ahead of the leader for a few days in November-December 2011, the market perceived it as an aberration. But after overtaking SBI in the last week of July, HDFC Bank continues to be India’s biggest bank in terms of market capitalisation and the lead is widening. It is quite clear that the Street has several other parameters to evaluate the performance and financial position of banks other than the profit record of individual players. Moreover, the street has understood banks’ ploy of playing with the books through “window-dressing”. These practices have not gone down well with the Street and hence the beating in terms of market capitalisation .
K V Rao Bangalore
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