Indian banks need to raise $37 bn to meet Basel-III norms: Moody's

23 Sep 2014


Moody's, the global ratings agency, has said India's 11 public sector banks will need to raise up to $37 billion in external capital by March 2019 to meet Basel-III norms.

This assessment is based on an assumption of moderate recovery in economic growth and a gradual decline in new non-performing loans from the currently elevated levels.

The PSBs will have to raise between Rs1.5 lakh crore and Rs2.2 lakh crore ($26 billion-$37 billion) as Tier-I capital by FY19, Moody's said in a statement. These PSBs represent 62 per cent of net loans in the Indian banking system.

''Indian public-sector banks barely meet the current minimum capital requirements, and we anticipate they will find it difficult to raise capital quickly in the current environment,'' said Moody's vice president Gene Fang.

Basel-III norms raise the minimum required capital levels for total Tier-1 to seven per cent and for Common Equity Tier-1 (CET1) capital to 5.5 per cent. Plus, banks will need to meet a ''capital conservation buffer'' in order to pay dividends, Moody's noted.

This would put pressure on Indian public-sector banks, because low capital levels remain a key credit weakness, the rating agency added.

''Weak asset quality has depressed profitability and internal capital generation, leaving public-sector banks reliant on periodic capital injections from the government,'' said Fang.

With the new Bharatiya Janata Party (BJP)-led government at the Centre looking to reduce the country's Budget deficit, the amount available for such injections is not likely to grow. While banks can tap the equity markets to raise capital, with still-low bank valuations, they might struggle to raise the required amount.

That's despite the recent rally in Indian stock prices, Moody's noted.

According to the rating agency, a significant part of the required capital - Rs80,000 crore ($13 billion) to Rs90,000 crore ($15 billion) - could be in the form of additional Tier-1 (AT1) capital. AT1 will have a fairly limited role when Basel-III is fully phased in from 2019. However, in the meantime, a significant amount of Indian public-sector banks' current Tier-1 requirements could be met with AT1 securities.

Under the transitional requirements, AT1 can account for the difference between the targeted eight per cent Tier-1 requirement and the 5.5 per cent minimum CET1 requirement for March 2015.

At the same time, AT1 securities would most likely be sold to domestic or international fixed-income investors.

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