Several public sector banks have fallen short of the Reserve Bank of India’s indicative leverage ratio of 4.5% in 2014-15, but bankers believe this is unlikely to be a big challenge when maintaining the leverage ratio becomes mandatory by the end of 2017 under Basel-III norms.
Lenders, such as Vijaya Bank, United Bank of India, UCO Bank and Syndicate Bank, had leverage ratios below 4.5% in FY15, says Jefferies in a research report.
The report estimated that others, such as Central Bank of India, Dena Bank and Bank of India, currently hold 4.5% and could slip below the level going ahead.
Bankers, however, said that there is no real challenge in maintaining the leverage ratio given that most Indian banks’ off-balance sheet items are limited. “Leverage ratio is important because off-balance items are a big part nowadays. But for public sector banks, it is not an issue because compared with balance sheet items, these are not every large,” said Animesh Chauhan, MD&CEO, Oriental Bank of Commerce. OBC is one of the public sector lenders that has a higher leverage ratio than 4.5%.
Basel-III norms mandate a minimum leverage ratio of 3%, but Indian banks will be required to maintain a leverage ratio of 4.5%, according to RBI. The leverage ratio was introduced after the global financial crisis revealed the need for checking exposure to derivatives and off-balance sheet exposure.
In January, while detailing the norms for leverage ratio, the RBI said that it would monitor all banks against an indicative ratio of 4.5%, but maintaining the ratio is not mandatory until end of 2017.
Nevertheless, amid worries over emerging capital constraints, banks that have large overseas operations and, therefore, large derivatives exposure, could feel the pinch.
“One is that banks that have large overseas operations could potentially have more off-balance sheet items. But even a domestic-oriented bank can have a greater derivatives exposure,” said NS Venkatesh, chief financial officer, IDBI Bank.
“Although RBI has maintained that banks are to maintain 4.5% leverage ratio, under the current circumstances, we find it hard to believe that many banks will be in a position to raise capital from the market to be compliant with the norms,” said Jefferies in its report.