The RBI may yet again defer the implementation of the last tranche of capital conservation buffer (CCB) by banks.

Reason: Investors want more clarity on banks’ asset quality, especially those in he public sector, as it is likely to be masked by the regulatory dispensations given to borrowers to cope with the Covid pandemic before committing funds for their capital raising programme.

CCB ensures that banks build up buffers during normal times (outside periods of stress), which can be drawn down as losses are incurred during a stressed period.

Considering the potential stress on account of Covid-19, the RBI had deferred the implementation of the last tranche of 0.625 per cent of CCB from March 31, 2020 to September 30, 2020. If CCB is not deferred, it will go up to 2.5 per cent from October 1, 2020 from the current 1.875 per cent, necessitating banks to raise capital.

Including CCB, the total capital ratio of a bank will go up to 11.5 per cent from October 1, due to the increase in CCB, against 10.875 per cent now.

Earlier deadlines

The transition to full CCB of 2.5 per cent by banks was to be completed by March 31, 2019. But the RBI deferred implementation of the last tranche to March 31, 2020. In view of the pandemic, this was deferred again by six months.

A senior official of a PSB said given that 10 PSBs have been consolidated into four only recently and a few other banks are under Prompt Corrective Action, it may be appropriate to grant a six-month extension in the implementation of CCB.

Credit rating agency ICRA recently estimated that for FY21, the capital requirements of PSBs could be in the ₹20,000 crore to ₹55,500 crore range. For private sector banks, it could be ₹22,000 crore to ₹33,400 crore in FY22, it said.

Fitch Ratings underscored that raising capital remains challenging in the current environment.

Impediments to fund-raise

“However, the new policy (allowing banks to restructure many types of loans) will reduce transparency over asset quality, which could further hinder some paths for capital-raising,” the credit rating agency said in a report.

Private investors, for example, may be more reluctant to participate in sales of stakes in PSBs until the impact of the pandemic on their balance sheets is clear, it added.

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