Transition to Basel III will not be a challenge: CRISIL

Pawan Agrawal, senior director, CRISIL Ratings told CNBC-TV18 that though the Basel III norms were not meant for Indian banks, they were relevant in addressing the problems which would rise as Indian banks transform into organisations similar to their global counterparts over the next decade.

Agrawal said that there would be no impact of the Basel guidelines on share market investors' perceptions in the valuation of Indian banks. He also explained that the transition to the Basel III was not a challenge.
But what would be, he added, was the raising of capital to support the growth that would occur in the banking system He concludes that the transition timeline has given banks time till 2018 to raise equity and to be able to prepare the market and the system to adjust. Below is an edited transcript of the interview on CNBC-TV18.
Also watch the accompanying video. Q: What will be the key impact on banks now that it is known that Basel III norms for 2013 and 2014 will not be such a huge burden?
A: Essentially, we are in full agreement. Allow me to explain the context of why such guidelines are actually needed. The norms were meant for the global banking system and were implemented primarily to rebuild confidence in the banking system and enhance systemic stability.
In India, the context is really the opposite. The banking system is already stable, well-capitalised and far less complex. Yet the requirement of Basel III norms is relevant for as over the next decade the challenges for Indian banks will become like their global counterparts. Therefore this is a right step in terms of preparing the Indian banks to address or prevent some of those challenges. Q: Will share market investors find any difference in the valuation of Indian banks immediately as of FY13?
A: If your question is related to the impact that will be on account of Basel III guidelines, my answer is from an immediate perspective is: No. That is because the current capital of the Indian banking system, as a whole both as at the core equity level as well as at the total capital level, is well above the requirement or under the Basel III even after 2018, once the full Basel III happens.
So therefore the transition to the Basel III is not something that we believe will be a challenge. However, the challenge is going to be the requirement of raising additional capital on an ongoing basis to support the growth that will happen in the system.
Secondly, the loss absorption clause, essentially to enhance the quality of capital that the Indian banking system will have, will lead to either higher pricing or a change in the investors' preference to invest in such instruments. Q: When will you start worrying about this for Indian banks, especially for state-owned banks where it is extremely difficult to make the government cough up capital?
A: The transition timeline from now till 2018 allows enough time for Indian banks to prepare themselves to raise equity and to be able to prepare the market and the system to adjust.
From a quantum perspective, we believe that the total quantum that would be required essentially by Indian banks is going to be about Rs 1.4 lakh crore to meet growth requirements in terms of complying with these guidelines. Q: You mean upto 2018?
A: Yes, upto 2018 and in addition to that, the amount of capital can actually be higher by another Rs 1 lakh crore if the investor appetite for the non equity tier-I capital turns out to be weaker.