Indian banks need Rs 1.75 trln more equity for Basel 3: RBI

Indian banks will require an additional Rs 1.75 lakh crore of equity capital over the next five-and-a-half years to conform to Base III norms, according to Reserve Bank of India estimates. RBI governor D Subbarao said this in his inaugural address at the annual FICCI-IBA Banking Conference in Mumbai today.

The amount could vary depending on the extent to which the central government will infuse equity capital state-owned banks, Subbarao said.
But the RBI does not foresee any major problem in the banks being able to raise the additional equity capital.

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"Over the last five years, banks have revised equity capital to the tune of Rs 52,000 crore through the primary markets. Raising an additional Rs 70,000-1,00,000 crore over the next five years from the market should therefore not be an insurmountable problem. The extended period of full Basel III implementation spread over five years gives sufficient time to banks to plan the time-table of their capital rising over this period," Subbarao said.

According to RBI estimates, should the government decide to maintain its shareholding at current levels in every bank, the burden of providing additional equity capital to state-owned banks will be of the order of Rs 90,000 crore.

If it decides to reduce its shareholding in every bank to a minimum of 51 per cent, the burden reduces to under Rs 70,000 crore.

In his address, Subbarao clarified on the various aspects of Basel III norms, its implications on Indian banks' profitability, and why it was important for Indian banks to embrace the rules.

The RBI governor rejected the widely held view that Indian banks should not adopt Basel III norms since it was not binding on them. Critics of Basel III also pointed out that the rules were designed for banks of developed countries, the root cause of the global financial crisis.

"Our position is that India should transit to Basel III because of several reasons. By far the most important reason is that as India integrates with the rest of the world, as increasingly Indian banks go abroad and foreign banks come on to our shores, we cannot afford to have a regulatory deviation from global standards. Any deviation will hurt us both by way of perception and also in actual practice," Subbarao said.

As Basel III requires higher and better quality capital, Indian banks are worried that conforming to the rules will hurt their profitability.
While Subbarao agreed that the banks were likely to feel the pinch in the short run, long term benefits more than justified the near term pain.

"The average Return on Equity (RoE) of the Indian banking system for the last three years has been approximately 15%. Implementation of Basel III is expected to result in a decline in Indian banks' RoE in the short-term. However, the expected benefits arising out of a more stable and stronger banking system will largely offset the negative impact of a lower RoE in the medium to long term. It is also fair to assume that investors will perceive the benefits of having less risky and more stable banks, and will therefore be willing to trade in higher returns for lower risks," Subbarao said.

He said the RBI would shortly take a view on whether government securities held under Liquidity Ratio (SLR) norms should be factored in while assessing a bank’s liquidity.

"One view is that since the Statutory Liquidity Ratio (SLR) securities are required to be held on an ongoing basis, they should not be reckoned for calculating liquidity requirements under Basel III. An alternate view is that since the Reserve Bank is expected to provide liquidity against these securities under stressed conditions as part of its lender of last resort (LoLR) obligation, at least a pre-specified portion of these securities should be taken into account for assessing compliance with Basel III’s Liquidity Standards," Subbarao said.