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Raising non-equity Tier-I capital of Rs.1.4 lakh crore will be a key challenge under Basel III requirement for Indian banks, according to a report by CRISIL Ratings.
The ratings agency estimates that Indian banks will need to raise Rs 2.7 lakh crore to meet Tier-I capital requirements consisting of a minimum of Rs 1.3 lakh crore as equity capital and up to Rs.1.4 lakh crore as non-equity Tier-I capital from April 2013 to March 2018 under Basel III guidelines issued by the Reserve Bank of India (RBI).
“Banks will face difficulties in raising Rs 1.4 lakh crore as non-equity Tier-I capital, as these instruments will carry higher risks than those under Basel II, given their equity-like features; these include discretion on coupon payments, and likelihood of coupon non-payment and principal loss if a bank’s equity capital falls below pre-specified threshold of 8 per cent,” said Pawan Agrawal, Senior Director, CRISIL Ratings.
Ramraj Pai, President, CRISIL Ratings, said, “This will limit investor appetite for such instruments. It will also reduce their attractiveness for banks, as these instruments will be costlier than those under Basel II. Nevertheless, non-equity Tier-I capital will still be cheaper than equity capital.”
According to Pai, “Several measures need to be taken to address this challenge. The range and depth of investors in such instruments can be expanded through a structured bond market development plan. This could include alignment of investment norms for long-term investors such as insurance companies and provident funds.
“The Government can consider investing in non-equity Tier-I instruments of public sector banks (PSBs) through the holding company for PSBs proposed by the Government, thereby developing market acceptance for such instruments,” he added.
Moreover, banks will need to focus on conserving capital under Basel III, primarily, by refinancing infrastructure loans that account for a sizeable chunk of their exposure, Agrawal said.
Further, despite the equity capital requirement more than doubling to 8 per cent from 3.6 per cent under Basel II, capital raising ability of private banks and government support to public sector banks, Indian banks are comfortably placed to raise the Rs 1.3 lakh crore equity capital by March 2018.
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