By?Devanshee Dave
“Indian banks are likely to require around USD 65 billion of additional capital to meet new Basel III capital standards that will be fully implemented by the financial year ending March 2019,” the rating agency Fitch said on 12th September. Last year Fitch estimated that there would be need of more than $90 billion. Now, the amount required is not reduced but still, it?s a tough task for Indian banks.
The Basel III requirements
Basel III norms are global norms for a unified banking standard. They are likely to hit the Indian banking system starting on 31st March 2019. As per Kotak Securities, Basel III has three main goals for the banking system: to make the sector suffice strong to withstand the economic and financial breakdowns, reduce the risk factor from the banking system, and increase the transparency in Indian banks.
The norms ask Indian banks to increase capital, liquidity, and also reduce leverage.?Indian banks must also meet the Liquidity Coverage Ratio (LCR), the RBI?s Statutory Liquidity Ratio (SLR), and the Cash Reserve Ratio (CRR) norms. This means that more money must be set aside to account for times of exigency or crisis when the value of money may fall down suddenly such as the 2008 Financial Crisis.
As per the norms, banks have to maintain a minimum common equity ratio of 8 percent and total capital ratio of 11.5 percent by March 2019.
The current banking scenario
As per an article in Economic Times, the provision level for Indian banks has increased in the last few quarters. In December 2015, the RBI?s asset quality review pushed the bottom line of several public sector banks (PSBs) into the red. Bad loans also hiked by around Rs 1 lakh crore up to Rs 6.06 lakh crore for the period of April to December 2016-17. The non-performing assets (NPAs) of the public sector banks also increased to Rs 5.02 lakh crore at the end of March last year, which was at Rs 2.67 lakh crore in 2015. The gross non-performing loan (NPL) ratio reached 9.7 percent in 2016-17, up from 7.8 percent in 2015-16.
Fitch?s warning for Indian banks
The Fitch rating agency warned Indian banks that to meet the Basel III needs, banks have to get the additional amount of $65 billion. According to Fitch, prospects and internal capital generation are weak; low investor confidence impedes access to the equity capital market and is likely to be dependent on state or central to meet the core capital needs.
As per a statement given by Fitch, ?State banks are unlikely to be freed from their current gridlock unless NPL resolution is accompanied by additional capital.”
Government?s action
Government has supported banks by the aid of Rs 70,000 crore, from which Rs 50,000 crore has already been injected in the last two fiscals and the remaining will be inject by the end of 2018-19. In addition to that the Finance Minister Arun Jaitley has already announced the capital infusion of Rs 10,000 crore for public sector banks in the current fiscal as per the Indradhanush scheme. As per the scheme, PSBs need to raise Rs 1.10 lakh crore from markets, including follow-on public offer, to meet Basel III requirements, which kick in from March 2019. For that RBI has also taken strict actions against NPAs and bad loans. There are 12 currently going through resolution, representing 25 percent of total system NPLs, and the RBI has recently released a list of 50 more accounts that banks have been directed to resolve within three months or push into the insolvency process.
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