RBI’s Relaxations To Provide Rs 35,000 Crore Capital Relief To Government Banks
The Reserve Bank of India’s decision to defer the full implementation of the "capital conservation buffer" prescribed for banks under Basel-III rules is expected to bring some relief to only a handful of state-owned banks, say analysts.
While government officials suggested that capital worth Rs 37,000 crore would be freed up, allowing for an additional Rs 3.7 lakh crore in potential lending, analysts are more circumspect on the costs and benefits of the decision.
According to rating agency CRISIL, the deferral will mean a relief of Rs 35,000 for the government.
As per our earlier estimates, they needed ~Rs 1.2 lakh crore over the next five months up to March 2019 to meet Tier 1 capital stipulated under Basel III norms. Now they would need only ~Rs 85,000 crore on implementation of deferral of the last tranche of CCB.Krishnan Sitaraman, Senior Director, CRISIL Ratings
However, peer ICRA felt that the benefit will be limited to those banks which have a CCB of higher than 1.875 percent but lower than 2.5 percent.
“With many banks struggling to meet the basic capital ratios, i.e. CRAR of 9 percent, the decision to extend the transition period for implementing the last tranche of Capital Conservation Buffer, by one year is likely to benefit only a few banks as most of the public-sector banks are not maintaining the existing CCB requirement of 1.875 percent,” said Karthik Srinivasan, group head of financial sector ratings at ICRA.
According to Macquarie Research, the banks which were could see some immediate relief include Punjab National Bank, Bank of India and Union Bank of India.
However, this apparent relief may prove to be a double-edged sword. “Note that rating agencies and equity investors alike may not view this forbearance favourably and have traditionally been comfortable with CET-1 (core equity tier-1) ratios of at least 9-10 percent,” said the research house.
Indeed, rating agency Moody’s Investors Service saw the RBI’s decision as credit negative.
The decision to extend the timeline for the full implementation of Basel III guidelines by a year is a credit negative for Indian public sector banks...With the regulatory timelines now extended, it may be a case that at least some of the rated public-sector banks’ CET1 ratios over the next 12 months would be lower than what we currently expect.Moody’s Investors Service
Most analysts also believe that the government would still need to commit more money to bank recapitalisation. As such, the RBI’s decision to defer the full implementation of the CCB only comes as a minor relief to the government.
While this would lessen the Government burden, we believe this is miniscule and would only meet the minimum requirements. Additional capital infusion would be required should the Government want the banks to push balance sheet growth.Jefferies