The RBI’s recent delay of Basel III implementation offers Indian banks more time to meet the minimum capital requirements, Fitch Ratings said in a report.
According to the agency, this could particularly benefit some state-owned banks facing capital pressure.
“The main benefit from the one-year moratorium will be the delay in the phase-in of the capital conservation buffer from end-March 2016 (FY16, which starts April1, 2016), instead of FY15, as most other parameters remain the same. More importantly, banks would get some crucial breathing space from the lower 5.5 per cent pre-specified capital trigger on additional Tier 1 securities until FY19 when it reverts to 6.125 per cent. The headroom of 0.625 per cent will be particularly helpful for mid-sized state-owned banks where capital buffers are particularly challenged,” the report said.
According to Fitch Ratings, RBI’s actions are a tacit recognition of the potential difficulty state-owned banks would have faced in meeting full capital requirements under the previous timelines.
State-owned banks still need the lion's share of the estimated total core capital requirement for the system, but have thus far largely relied on the Government for new capital because of low internal capital generation and weak access to equity markets.
Basel III instruments
The RBI has also provided additional clarity on Basel III capital instruments and their behaviour, particularly on the issue of loss absorbency. The exclusion of temporary write-downs on Basel III capital instruments reinforces the regulator’s intent to ensure capital securities act like equity when required under stress.
The flipside though is that greater loss absorbency would come at the cost of being less investor friendly. Tier 1 securities are expected to shoulder a large share of the capital burden and investor appetite is currently limited adding to the capital raising challenges, the report added.