An increase in capital requirements in India spurred by robust economic growth is likely to weigh on banks' capital adequacy, which has already started showing signs of erosion. A decline in the core capital base, though still well above the minimum requirement, may necessitate banks to raise equity funds in the long term. "The Capital to Risk (Weighted ) Asset Ratio (CRAR) based on Basel II was 13.86% as at end-June 2011... lower than 14.19% as at end-March 2011," the Reserve Bank of India said in a report.
The assessment is based on unaudited results of banks for the first quarter ended June. However, the central bank observed that the overall capital adequacy of banks is much higher than the minimum requirement. Banks' capital structure consists of Tier I and Tier II capital. Tier I is a measure of a bank's core capital, including equity capital and disclosed reserves, while Tier II is secondary bank capital that includes undisclosed reserves, general loss reserves and subordinated term debt.
The current capital norms require banks to maintain total capital adequacy ratio, comprising Tier I and Tier II, at 9% of risk weighted assets. "Apart from SBI, none of the PSBs (public sector banks) may need significant Tier I capital in the short term. Some of the fast growing, small private sector banks may need Tier I capital," according to a recent report by ratings agency Icra. Though banks have ample capital in their Tier I kitty as per the Basel II requirements, there could be a pressure on equity capital once Basel III norms, expected by April 2013, are in place. Basel III norms propose 8.5% Tier I capital against the current practice of 6% at public sector banks.
"Nine public sector banks have Tier I less than 8.5%, compliance with Basel III norms may dilute the return on equity," said the Icra report. "Going forward, the capital requirements including equity are likely to be substantial for supporting the high GDP growth and the fact that Credit to-GDP ratio, which is currently quite modest at about 55%, is bound to increase substantially on account of structural changes in the economy i.e., financial inclusion programme, increase in loan requirements from more credit intensive sectors such as manufacturing and infrastructure , etc," RBI deputy governor Anand Sinha said last week. Need to raise equity capital in the long term will put public sector banks at a disadvantage due to minimum 51% government holding norm.
+1.jpg)
0 comments
Post a Comment