The Hindu Business Line : Basel compliance requirements

The implementation of the Basel guidelines would enhance the risk capital requirements for the banking sector. Another factor to note is the high non-food credit growth.

Bangalore , Feb. 17

MORE public sector banks are likely to foray into the capital market ahead of the implementation of operational risk guidelines prescribed by the Reserve Bank of India.

The guidelines are tentatively expected to come into effect from April 2007.

The RBI has adopted the same definition for operational risk as the Bank for International Settlements (BIS). Operational risk, as defined by the BIS, is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.

According to these guidelines, bankers are expected to make a capital charge of 15 per cent of the gross income over the last three years. Gross income, according to the draft RBI guidelines, includes net profits plus provisions, but excludes profits from sales of Held-to-Maturity category investments and income from insurance.

Banking sources said the guidelines were likely to find most of public sector and some private sector banks short of capital. Bankers said though the BIS norms would release some capital on account of the revised risk weightage for certain classes of retail credit, it would, however, be neutralised by higher requirements by certain other categories of advances.

Bankers said that implementation of the guidelines would enhance the risk capital requirements for the domestic banking sector. The requirements of risk capital was also amplified by the high non-food credit growth. Since the beginning of this financial year, credit offtake has grown at an annual clip of 30 per cent plus.

In anticipation of the large capitalisation, some large PSU banks - Union Bank of India, Bank of Baroda and Andhra Bank - - have already tapped the market. But most other public sector banks have deferred their plans to the next financial year.

Among the banks expected to tap the markets during the next financial year is Canara Bank. Bankers said pricing concerns also triggered the deferral. Most of them expect to get a better pricing on their follow-on issues in view of the better profits during the current year. This was despite depreciation on investments.

Profits next year are likely to be powered by high credit off-take, better NPA recoveries and reduced costs of working funds. These would translate into better earnings per share.

Public sector banks are currently trading at a price to earnings (PE) ratio of 11.9 per cent. Bankers said this PE was indicated that PSU banks were still undervalued despite the buoyant equity market.

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