India's banks face tough period
India's struggling banking sector will face a period of lower profitability as it seeks to raise at least Rs5,000bn (USD 90bn) in extra capital to meet the new Basel III international banking standards, the head of the nation's central bank has warned.
September 05, 2012 / 19:03 IST
India's struggling banking sector will face a period of lower profitability as it seeks to raise at least Rs 5,00,000 crore (USD 90bn) in extra capital to meet the new Basel III international banking standards, the head of the nation's central bank has warned.
Duvvuri Subbarao, governor of the Reserve Bank of India, also suggested that prime minister Manmohan Singh's government could consider reducing its majority stakes in a variety of state-owned banks, as it attempts to cut the Rs 90,000 crore (USD 16bn) in recapitalisation needed to maintain present shareholding levels.More News From Financial Times
Panasonic returns to profit YPF to sell $760m in bonds Market conditions hit Schroders Whitman warns of long HP recovery Jaguar Land Rover cautions on expansion The warning comes at a time of rising concerns over the health of India's banking system, and the state-backed institutions that make up over three-quarters of lending in particular, given sharp recent rises in non-performing and restructured assets against a backdrop of slowing economic growth. "Implementation of Basel III is expected to result in a decline in Indian banks' Roe [return on equity] in the short term," Governor Subbarao said, speaking at a banking conference in Mumbai, while stressing that the reforms would benefit India's overall financial system in the longer term. The global Basel III requirements, which require all banks to hold top quality capital equal to 7% of their assets, adjusted for risk, are aimed at improving financial stability and avoiding a repeat of the crisis of 2008. But the sharply higher capital requirements have drawn warnings from analysts and financiers about their impact on banking lending rates and wider economic growth across the developing world. Governor Subbarao said the new norms, which will be phased in between 2013 and 2019, would also increase the cost of capital for banks, while placing a particular strain on government finances, given India's widening fiscal deficit. "Clearly, providing equity capital of this size in the face of fiscal constraints poses significant challenges," he said, suggesting that Mr Singh's administration could save Rs 20,000 crore (USD 3.4bn) in recapitalisation costs if it reduced its stakes in all state-owned banks to just 51%. India's government has so far rejected suggestions that it might reduce its shareholding in more than two dozen public sector banks, including a stake of approximately 60% in the State Bank of India, the nation's largest lender by market share.Facing a declining national saving rate and wary equity markets, however, analysts questioned whether policy makers or banking leaders would be able to raise the level of funds indicated by Governor Subbarao's remarks without selling larger stakes, potentially to foreign investors. "To my mind this is the single most vexing challenge for the government and the banking industry in India, because I don't think they have a clue where these funds will come from over the next decade," says Ravi Trivedy, an independent banking analyst and former executive director at KPMG India.In addition to fresh infusions from government, India's state-backed banks will need to raise at least USD 20 billion from equity markets to meet the Basel requirements, creating the risk of a capital shortfall in coming years, according to Fitch, the rating agency. "With its back to the wall and few other sources of capital available, the government may not have a choice but to lower its stake in these banks," Mr Trivedy says, "and this could well mean allowing foreign investors to buy a strategic stake." A taskforce of leading bankers warned in June that the Basel III rules were too focused on problems that occurred in Europe and the US. They argued the standards unfairly penalise trade finance and project finance, two forms of credit that are particularly important in developing nations.But Governor Subbarao said India, which is a member of the global standard setting body, needed to conform to the rules. "The 'perception' of a lower standard regulatory regime will put Indian banks at a disadvantage in global competition," he said. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
