India’s capital-starved public sector banks (PSBs) can breathe a little easy for another year. The Reserve Bank of India (RBI) has chosen to relax guidelines on the implementation of Basel-III norms. So, these banks need not rush to raise capital right away. PSBs have been given another year to implement the Basel-III capital regulations. Under these, banks were to put in place a capital conservation buffer from March 31, 2015 in phases. Now, banks will need to start doing this by March 2016. RBI has also amended the loss absorption features for non-capital equity instruments.
The central bank appears to have taken this step in the wake of difficulties some PSBs have faced in raising capital from abroad. A couple of these banks have found it difficult to raise dollar debt to meet their capital needs and RBI’s move will give them more time. Struggling with high accretion of bad loans and weak profitability, these banks have been finding it tough to raise Tier-I capital from investors abroad. Antique Stock Broking says: “Banks in India have been struggling to raise additional Tier-1 capital under Basel-III guidelines, given the high risk premium that investors are demanding due to new loss absorption features.”
While this does not take away the pressure of raising capital, RBI’s move will reduce PSBs’ capital-raising needs by nearly 45 per cent over FY15-16, according to estimates by brokerage Prabhudas Lilladher. The rush of paper from these banks, as a result, will be spaced out. “This is a big positive, as investors are currently factoring in significant book value dilution in PSBs’ valuations,” Prabhudas Lilladher adds. As capital calls from some of the weaker banks decline, their valuation discount, too, would decline compared to the stronger peers. Analysts were factoring in book value dilution of 20 per cent for Bank of India and Union Bank, which increased the valuation gap between them and stronger banks. Some of this valuation gap might narrow between the weaker and stronger PSBs in the near term.
