The Reserve Bank of India's draft guidelines for the implementation of Basel III norms are credit positive for the banking sector as they are more conservative than the Bank for International Settlements norms, according to global credit rating agency Moody's Investors Service.
Basel III is a global regulatory standard on bank capital adequacy, liquidity and leverage agreed upon by members of the Basel Committee on Banking Supervision.
Moody's said the key differences between the RBI's Basel III guidelines and the BIS' Basel III norms are: a more stringent minimum common equity Tier 1 capital of 5.5 per cent (versus BIS's 4.5 per cent); and an earlier deadline for the implementation of a 2.5 per cent capital conservation buffer at March 2017 (BIS' deadline is January 2019).
Further, the RBI has prescribed a more aggressive schedule for minimum total capital ratio, targeting 11.5 per cent by March 2017, versus BIS' 10.5 per cent by January 2019.
The rating agency said the RBI's timetable implies an extra capital buffer for Indian banks of 2.25 per cent during 2015-17, which is clearly credit positive for the sector.
Impact on Indian banks
Moody's observed that it expects the effect on individual banks to vary, with Central Bank of India and IDBI Bank likely to be the most affected because both currently have core equity capital significantly below 8 per cent.
Thus, these two banks would face the difficult choice of either raising fresh equity capital or reducing business growth and risk-weighted assets.
The rating agency also expects Indian Overseas Bank, Yes Bank, and State Bank of India, all of which rely heavily on Tier-2 debt capital instruments to support their total capital levels, to face pressure to strengthen their capital under the new regime.