Basel III deadline extension a big relief for banks: Report

Written by PTI | Mumbai | Updated: Mar 29 2014, 00:28am hrs
The Reserve Bank of India (RBI) decision to defer the implementation of Basel III capital regulations by a year to March 2019 will give relief to banks, especially the state-run ones, from issuing hybrid tier I capital next fiscal, India Ratings said today.

The apex bank yesterday said, "the transitional period for full implementation of Basel III capital norms is extended up to March 31, 2019, instead of March 31, 2018," due to the industry's concerns on potential stress to asset quality.

"The RBI's deferral of the Basel III implementation deadline by a year has eased the pressure on banks to issue hybrid tier I capital in FY15," the rating said in a report.

"This is a practical outcome of the current limited investor appetite for such instruments and we believe the new deadlines do not dilute the spirit of Basel III," it said.

According to an earlier estimate by RBI, banks, led by state-run lenders, as a whole need close to Rs 5 trillion on fresh capital, of which Rs 1.75 trillion will be in core capital, to meet the stringent norms under Basel III.

The regulator said there were industry-wide concerns about the potential stress on asset quality and consequential impact on performance and profitability of banks.

"This may necessitate some lead time for banks to raise capital within the internationally agreed timeline for full implementation of the Basel III capital regulations," the RBI said.

However, India Rating believes capital injection would remain a priority for banks through the rest of this decade, as the total capital required during the migration to Basel III has only gone up due to addition of an extra year.

The report said as the Government is committed towards maintaining its majority shareholding in public banks, they will keep steady equity infusion in them. The rating agency has a long-term issuer rating for the PSU banks.

The earlier guideline required banks to issue as much as Rs 26,000 crore of hybrid tier 1 in FY15, significantly higher than Rs 11,200 crore of common equity tier I that the Government has budgeted to inject during the year.

"While the capital requirement in FY15 has diminished significantly, the Government is likely to maintain its schedule of injecting capital," the report noted.

India Ratings said while the budgeted amount of Rs 11,200 crore is now higher than the new requirement of under Rs 10 billion equity by PSU banks in FY15, injecting the full amount will help reduce capital pressures in subsequent years.

It can also help meet part of any shortfall in the hybrid tier 1 requirement of Rs 13,400 crore now estimated for FY15, the report said.

The revised norms have also tightened the loss absorption features of hybrid capital by eliminating the temporary write-down feature in both hybrid tier 1 and tier 2 instruments, it said.

"These instruments now can be either permanently written down or converted into equity, which improves the quality of capital by increasing any potential loss that investors may face."

The agency, however, said it's approach to rating the hybrid debt capital of a bank remains unchanged despite Thursday's revised guidelines.

Basel series of norms refer to a broad supervisory standards formulated by Basel Committee on Banking Supervision (BCBS) - of which India is a member - to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.