The Reserve Bank of India (RBI) on Tuesday revised its regulations on how banks can treat certain items in their balance sheet and brought them further in line with those recommended by the Basel Committee on Banking Supervision (BCBS). The revisions are expected to reduce their capital-raising requirements.
The revised regulations include treating revaluation reserves, subject to conditions, as Common Equity Tier 1 (CET1) capital at a discount of 55%, instead of as Tier 2 capital; treating foreign currency translation reserves (FCTR), subject to conditions, as CET1 capital at a discount of 25%; and several directives on how to treat deferred tax assets (DTA) vis-à-vis CET1 capital.
According to estimates, these relaxations, particularly that of treating revaluation reserves as CET1 capital, given the huge amounts of physical assets PSBs are sitting on, will free up capital upwards of Rs 30,000 crore-35,000 crore for them and upwards of Rs 5,000 crore for private sector banks.
Hinting that RBI is looking at all such possible measures to augment the existing capital of banks, which would reduce the burden on them to raise fresh capital to a certain extent, governor Raghuram Rajan had last month said, “RBI is trying to identify non-recognisable capital, such as undervalued assets, already on bank balance sheets and could allow some of these to count as capital under Basel norms, provided a bank meets minimum common equity standards.”
Issued a day after finance minister Arun Jaitley allocated R25,000 crore for the recapitalisation of PSBs in FY17, these fresh directives come as a pleasant surprise to those fearing that the budgetary allocation won’t be sufficient, given the fact RBI’s asset quality review has forced quite a few banks to recognise several assets as non-performing assets, thereby necessitating higher provisions and consequently, capital raising requirements.
According to Vibha Batra, senior vice-president and group head of financial sector rating at ICRA, “These directives from RBI will ensure that PSBs won’t have any trouble meeting Tier 1 capital requirements this fiscal, which according to our estimates is about R40-60,000 crore. Just State Bank of India, if you go by its estimated revaluation reserves of R20,000 crore (as disclosed during last quarter earnings), will have access to R9,000 crore of additional capital. Add to this the government’s R25,000 crore allocation to recapitalise PSBs, and they should easily sail through till the end of the year”
However, although RBI’s timely move has come as a short-term relief for PSBs, many believe that meeting capital requirement norms will continue to be a challenge for them in the next few years. In a report titled Apocalypse Now, Macquarie Research had noted last month, “Capital requirements for PSU banks to meet Basel III norms by FY19 are huge, at $33 billion (over R2.2 lakh crore) as per our estimates, and pose an additional challenge.”