‘Basel-III may result in 1/2 of banks breach capital triggers’

Mumbai, Sep 12 (PTI) Increased capital requirements underBasel-III norms may result in half of domestic lendersbreaching trigger levels, Fitch said today while suggestingthat government allocate more capital to state-run banks asthey will be the most affected. With poor existing capital buffers and weak prospects forraising capital through market channels, the state-run lendersare most at risk, said the credit rating agency. "The progressive increase in minimum capital requirementsunder Basel III is likely to put nearly half of Indian banksin danger of breaching capital triggers," it said. At the end of June 2016, the total capital adequacy ratio(CAR) for 11 banks was at or lower than the minimum of 11.5per cent required by end-March 2019, when the capital-intensive Basel-III framework will be adopted in full. There is a roadmap of steady increase in the capitalbuffers till the full adoption, Fitch said, adding that six ofthe 11 banks do not have sufficient capital to meet the March2017 milestone. It said the minimum total CAR is a prerequisite forpayment of coupons on both legacy and Basel III perpetual debtcapital instruments. Fitch had recently come out with an estimate saying thatthe Indian banking system will require USD 90 billion in freshcapital till financial year 2018-19, when it will complete themigration to the capital-intensive Basel-III frameworkcompletely. It had said that the 27 state-run banks will need80 per cent of this estimate. In the note issued today, Fitch acknowledged government’scommitment to pump in USD 10.4 billion under the Indradhanushprogramme and also the frontloading of USD 3.4 billion thisfiscal but called for more steps and money. "We believe that more capital will be needed from thegovernment to restore market confidence," it said, adding thatthe state-run lenders are "heavily reliant" on the governmentfor new capital. "Sharply deteriorating financial profiles have raised thestandalone credit risks of state banks over the last year.Equity valuations have suffered as a result. Most continue totrade at heavy discounts to their book value, which acts as asignificant constraint on raising new core equity," it said. It added that largest lender State Bank of India’sproposed USD 1 billion dollar-denominated additional tier-Icapital infusion will serve as a pricing benchmark for otherbanks keen to access the dollar AT1 market. The RBI move to allow banks to raise capital through themasala bonds route of raising rupee-denominated bonds offshorehelp widen the investor pool and ultimately deepen the marketfor AT1 bond issuance. However, despite this, the state-run banks will continueto face difficulties in raising capital from the market, whichwill keep their viability ratings under pressure and willweigh on the sector outlook, it said. PTI AA DKSASDM