Banks, led by state-run lenders, may need up to Rs 1 trillion over and above their Basel-III capital requirements to deal with concentration risks resulting from their high exposure to stressed large corporates, says a report.
Public sector banks alone may need a whopping Rs 93,000 crore of this amount, the report said, adding banks need an additional core capital of Rs 2.5 trillion under Basel-III guidelines.
“Banks may need up to Rs 1 trillion over and above their Basel-III capital requirements to manage the concentration risks arising out of their exposure to highly levered, large stressed corporates,” India Ratings said in a report today.
Public sector banks’ Rs 93,000 crore requirement is equivalent to an equity write-down of about 1.7 per cent of their risk weighted assets (RWAs), and represents the loan haircut that they may have to take to revive the financial viability of distressed accounts, the report said, adding most exposures are treated as performing and carry minimal loan loss provisions.
The report, however, said if corporates are able to reduce borrowing costs by 100 bps, the shortfall may come down to Rs 76,000 crore from the estimated Rs 1 trillion.
“While our analysis indicates a potential haircut on a blended basis at around 23-24 per cent, banks may also consider a senior-subordinated structure for the current exposure,” the report said.
Last week, the government had said the public sector banks would need to raise Rs 1.10 trillion from markets to meet more than half of their capital requirement of Rs 1.80 trillion over the next four years to meet the Basel-III capital adequacy norms.
Of this Rs 1.80 trillion fresh growth capital, the government said it would provide Rs 70,000 crore over a period of four years out of which they will be getting Rs 25,000 crore in FY16 and a similar amount in FY17. The banks would have to raise the balance amount from the markets, the ministry had said.
“The shortfall may increase the government’s equity injection requirement from Rs 70,000 crore announced on July 31,” the report said.
The agency said the access to equity will be a critical input to its rating of additional tier-1 bonds, as the instruments carry loss triggers linked to the bank’s common equity tier-1 ratio.