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Monday, September 22, 2014

State-run banks need $37 billion in fresh capital to meet Basel III norms: Moody's

Rating company Moody's has said that capital requirement for government owned Indian banks may rise to 8% to $37 billion as the economic recovery could raise the demand for loans. It would be difficult for banks to raise the needed capital if the economic reforms do not lead to lower government's holdings in banks.

Assuming a moderate recovery in economic growth and a gradual decline in new non-performing loans (NPLs), Moody's has estimated that rated public-sector banks in India will need to raise Rs 1.5 - Rs2.2 trillion ($26 - $37 billion) in Tier 1 capital externally between FY'15 and full implementation of Basel III in FY' 19. The estimate is equivalent to 42%-61% of public-sector banks' aggregate market cap (as of 12 September 2014), the ratings firm has norm. Basel II are the new capital norms prescribed for banks globally by the Bank of International Settlements head quartered in Basel, Switerland.

A study by the ratings firm of the banks it rates noted that in the three years between FY'11 and FY'14, annual loan growth at rated public-sector banks averaged 18%, while pre-provision income declined to 2.6% of risk weighted assets or RWA from 3.3% of RWA. " Weak asset quality has depressed public-sector banks' profitability and ability to generate capital internally, leaving them reliant on periodic capital injections from the government." Moody's said in a release.

The implementation of Basel III requirements will raise the minimum required capital levels for both total Tier 1 and Common Equity Tier 1 (CET1) capital. By March 2015, the minimum Tier 1 capital ratio will increase to 7.0% while the minimum for CET1 capital will rise to 5.5%. In addition to these minimum requirements, a Capital Conservation Buffer (CCB), needed for banks to pay dividends, will be phased in starting from March 2016. As a result, the total Tier 1 capital required to meet transitional minimum requirements and the transitional CCB will exceed the current 8.0% Tier 1 target by FY2017.

Injections of public money will provide some support, but there are constraints as the new administration under prime minister Narendra Modi looks to reduce the country's budget deficit. Banks could use the listed equity markets to raise capital, but current valuations may limit the feasibility of raising large amounts of money through this avenue. Even after hopes for the new government boosted Indian stock prices by more than 30% in the past six months, most Indian public-sector banks  still trade at a discount to their book value, Moody's said.

Source : Economic Times


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