Public sector banks need $40 billion in additional equity capital to meet Basel III norms: Fitch

Global ratings agency Fitch yesterday said that public sector banks would need to mobilise as much as $40 billion in additional equity capital over and above their retained earnings to comply with Basel III capital norms.

Of the $50-billion additional capital that domestic banks needed by 2018 to meet the Basel III, state-run lenders would need to mop up $40 billion, it said.

"Of the $40 billion that the government banks need, about half is likely to be injected by the government based on its stated intent of maintaining majority shareholding. Government support has received a boost since 2008 and it has budgeted for an equity injection of $2.5 billion this fiscal. The requirement will, however, accelerate in FY16 and needs to be planned," the agency's report said.

The remaining equity of upto $20 billion would need to be raised from markets and it represented a significant addition for banks. Banks raised only around $2.5 billion of common equity from the markets in FY11 and FY12.

Unless planned, government banks could end up facing a sudden shortfall in capital during FY16, warranting additional support by the sovereign and adding to pressure on government finances. It further noted that most of the requirement of $50 billion was back-ended with over 75 per cent to be added between FY16 and FY18.

The additional equity was a reflection of growth capital as also a buffer above the regulatory minimum. According to Fitch, this was needed due to the fact that "the guidelines released on May 2 do not yet provide for a counter-cyclical capital buffer or additional capital for systemically important banks. Our calculations add half a percentage point of the additional common equity to the regulatory minimum, which banks may like to maintain to avoid breaching the conservation buffer with the attendant restrictions on dividends and other payouts".