BANKS NEED RS 6-LAKH-CR CAPITAL TO MEET BASEL III NORMS: ICRA

Indian banks in the public and private sector will need to raise Rs 6 lakh crore in external capital over the next nine years, to comply with the proposed Basel III guidelines on capital adequacy levels, according to credit rating agency ICRA.

The agency cautioned that the higher level of core capital projected by the guidelines could dilute the return on equity for banks, besides lowering their leveraging capacity.

Nevertheless, Indian banks may still find it easier to make the transition to a stricter capital requirement regime than some of their international counterparts, since the regulatory norms on capital adequacy in India are already more stringent.

Also, most Indian banks have historically maintained their core and overall capital well in excess of the regulatory minimum.

Basel III guidelines

The proposed Basel III guidelines seek to improve the ability of banks to withstand periods of economic and financial stress by prescribing more stringent capital and liquidity requirements for them.

“It is the public sector banks that would require most the capital, given that they dominate the Indian banking sector,” said ICRA in a report.

Positive move

The capital requirement as suggested by Basel III is a positive move for banks as it raises the minimum core capital stipulation, introduces counter-cyclical measures, and enhances banks' ability to conserve core capital in the event of stress through a capital conservation buffer, according to the agency.

As for the liquidity requirement, the agency said, the liquidity coverage ratio under the proposed Basel III guidelines does not allow for any mismatches.

Comparable current regulatory norms prescribed by the Reserve Bank of India, on the other hand, permit some mismatches, within the outer limit of 28 days.

No significant issues

However, there are unlikely to be any significant issues for the Indian banks to adapt to these as and when they become applicable.

The prescribed liquidity requirements are aimed at bringing in uniformity in the liquidity standards followed by banks globally.

This requirement would help banks better manage pressures on liquidity in a stress scenario.

Source: http://www.thehindubusinessline.com/2010/09/24/stories/2010092451750600.htm