Government Seeks Relief From Bank Capital Requirement Under Basel-III Norms
Deferral of Basel III norms could help bring down the capital requirements for banks.
Banks, laden with bad loans, have been seeking all kinds of relief from the regulator in restructuring stressed assets and providing for them.
Now its the turn of the government, the majority owner of most of these banks, to seek relief. The relaxation being sought is in the form a deferment of full implementation of Basel III norms, which lay down the capital that banks have to hold.
According to two senior finance ministry officials, the government has floated the idea of extending the time over which banks have to comply with Basel III norms. This would reduce the amount of capital that banks have to raise over the next two years, in turn, providing relief to the government which does not have the fiscal space to infuse large amounts of money into these lenders
The Economic Times newspaper first reported news of the proposal on Monday.
One of the officials cited above told BloombergQuint that that the proposal is being discussed with the Reserve Bank of India. The RBI has raised some reservations, and is not in favour of the move, the official said. Given the central bank’s reservations and the repercussions a deferral of Basel III norms may have on bank ratings, the proposal may not eventually go through, the official added.
Emails sent to the Ministry of Finance and the RBI seeking confirmation did not elicit a response.
India embarked on a six-year roll-out of the Basel III norms in 2013. As per the current plan, banks will fully implement these capital standards by March 31 2019.
Under Basel-III norms, banks must maintain a minimum capital adequacy ratio of 11.5 percent by March 2019. Of the total, tier-I capital must be 7 percent, with a provision for 2 percent in tier-II capital. Banks must also maintain a capital conservation buffer of 2.5 percent of risk weighted assets.
The second official cited above said that such a move will help government in capitalising banks based on their needs. This will give the lenders some respite to lend more at a time when they are struggling to clean up their balance sheets, and raise capital.
The government allocated Rs 70,000 crore for infusion into banks over a four-year period as part of the Indradhanush scheme. Under the plan, Rs 10,000 crore each is due to be allotted in fiscal 2018 and fiscal 2019.
Rating agencies, however, expect the capital needs to be much higher. In addition, the RBI’s attempts to fast-track bad loan resolution could also lead to additional capital requirements. This is because banks may need to step up provisions against stressed assets to be in a position to take steep haircuts.
In an interview with BloombergQuint on June 14, Sanjeev Sanyal, principal economic adviser to the government, said that a final fix on the amount of capital needed would emerge once the bad loan resolution plans are put in place.
“This (capital requirement) can be dealt with in various ways. Some may come through the budget. You could also pare down the government’s holdings because in many banks the holding is very high. You could create recapitalisation bonds. Every tool available will be used,” Sanyal said.
Analysts’ Take
In case there is a relaxation in the implementation timelines of Basel III norms, it will give banks time to strengthen their capital positions, Karthik Srinivasan, senior vice president of ratings agency ICRA, told BloombergQuint.
There could be a downside to such a relaxation as well.
Another senior analyst from a ratings agency said, requesting anonymity, that if forbearance is allowed on Basel III migration, it will reflect the stress prevalent in the banking sector, especially relating to raising of capital.
Udit Kariwala, a senior analyst at India Ratings, said that deferring implementation of Basel III norms could have a negative impact on the development of the Additional Tier 1 (AT-1) bond market.
The AT1 bond market has seen significant issuance in the last 12 months with some tailwinds in FY17 due to favorable treatment from mutual fund and insurance sector regulators...The delay could have an adverse impact on recent efforts to develop this market.Udit Kariwala, Senior Analyst, India Ratings
AT-1 bonds have no maturity date, and the issuing bank has the option to call back the bonds or repay the principal after a specified period of time. However, these bonds have a feature which allows banks to skip coupon payments if capital falls below a prescribed level. Given this feature, investors tend to be careful in investing in these bonds unless banks are well capitalized.