Given the credit growth expected in the short to medium short, the capital requirement of the Indian banks would cross a huge level of Rs five lakh crore while meeting the globally mandatory Basel III banking norms by March 31,2019, in a joint study of ASSOCHAM-NIBM.
“On the other hand, banks in the public sector may find it very challenging to meet the Basel III requirement as majority of the funds are required to be inducted by the Central Government, as it owns majority stake in them,” noted the study titled ‘Basel III standards: Concepts, issues & challenges,’ conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) jointly with National Institute of Bank Management (NIBM).
With the assumption of at least 20 per cent credit growth in the short to medium term, the core equity needs are likely to be Rs 1.75 lakh crore and non-equity requirement through Tier-I and Tier II bonds to be Rs 3.25 lakh crore.
Breaking it further, the PSU banks would need to bring in Rs 1.50 lakh crore while those in the private enterprise Rs 0.25 lakh crore .
“However, keeping in view the dismal performance shown by majority of the public sector banks in recent years, it shall be difficult for them to raise the capital to this magnitude from the market,” the ASSOCHAM-NIBM study, authored by several leading bankers and academicians said.
Similarly, raising non-equity capital through Tier-I and Tier II bonds to the extent of Rs 3.25 lakh crore both by the government and private banks is equally challenging.
“This is due to the existence of a very limited market for Tier-I and Tier II bonds. The success of raising capital through this route lies on the broad development of this market,” it said.
While some of the major banks in India may resort to global markets , that route would enhance the cost of capital significantly and thus add more stress on their profitability.
The challenge will be to achieve the most optimal model for implementation of Basel III – one that will fortify the sector while not impairing its efficiency or delivery.
In order to achieve this, we need a supportive capital markets environment and depth in the corporate bonds market…” ASSOCHAM President and one of the most respected bankers, Mr Rana Kapoor said.
While even Basel II could not prevent the global subprime mortgage crises and collapse of Lehman Brothers, the next level of Basel III is an initiative for internationally coordinated regulatory change that is designed to offer a response to some of the inadequacies of the regulatory framework as it stood before the financial crisis of 2007-2011.
In India, the RBI has set a deadline of March 31,2019 for implementation of these norms even as the banks are battling the challenges of NPAs and volatile capital markets.