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Public Sector Banks require 26–37 billion US dollars to meet Basel-III norms: Moody

Sep 26, 2014 15:31 IST

Global rating agency Moody on 22 September 2014 released a report titled Indian Banks Could Need 26-37 billion US dollar in External Capital for Basel III Compliance.

In the report it revealed that 11 Indian public sector banks (PSBs) need to raise 26 to 37 billion US dollar in external capital in the financial year 2015 in order to meet the Basel-III capital adequacy norms by financial year 2019.

This projection of Moody is based on the assumption that there is a moderate recovery in India's GDP growth, and a gradual decline in nonperforming loans from current levels.

Main highlights of the report
• In rupee terms these banks will require additional 1.5 to 2.2 trillion rupees to fully comply with the Basel-III norms.
• A significant part of the required capital, around 800 - 900 billion rupees (or 13-15 billion US dollars) could be in the form of Additional Tier 1 (AT1) capital.
• Moody's notes that these PSBs constitute 62 percent of the net loans in the Indian banking system but barely meet the current minimum capital requirements. As a result PSBs will find it difficult to raise capital quickly in the current environment.
• The report further said that weak asset quality has led to depressed profitability and internal capital generation in PSBs. As a result, they have to rely on periodic capital injections from the government.
• It noted that PSBs could find it difficult to raise the required amount even if they tap the equity markets because of low valuation of these banks. Even the recent stock rally may not prove to be the saviour.

Basel-III Norms
Basel III raises the minimum required capital levels for both Tier 1 capital to 7.0 percent and Common Equity Tier 1 (CET1) capital to 5.5 percent. Besides, the banks will also need to meet a Capital Conservation Buffer in order to pay dividends. These will be pressurizing the Indian public-sector banks due to low capital levels remain a key credit weakness.

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