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Rating agency CRISIL today said Indian banks would need to raise Rs 2.7 lakh crore by March 2018 to meet the Tier-I capital requirements under the Basel-III capital framework. The latter mandates a Tier-I capital adequacy of eight per cent. These rules are to be implemented in phases from this April.
Of this Rs 2.7 lakh crore, the banks need to raise Rs 1.3 lakh crore as equity Tier-I capital and up to Rs 1.4 lakh crore in non-equity. CRISIL says the banks can comfortably raise the former but the latter will be challenging, as the instruments' features are riskier than under the Basel-II rules.
Development of bond markets to help banks raise the non-equity capital component is important, said CRISIL. Also, there is need to refinance infrastructure projects to conserve the capital of banks. Infrastructure Debt Funds would facilitate such refinancing, said Pawan Agarwal, senior director at CRISIL Ratings.
The Reserve Bank of India had estimated total capital requirement (including Tier-I and Tier-II) for Indian banks at Rs 5 lakh crore. It had estimated Rs 3.25 lakh crore of equity capital and Rs 1.75 lakh crore of non-equity capital for Basel-III requirements.
Elaborating on banks' likely difficulties in raising Rs 1.4 lakh crore as non-equity
Tier-I capital, CRISIL said the instruments would carry higher risk for their equity-like features, including discretion on coupon payments and likelihood of coupon non-payment and principal loss if a bank's equity capital falls below the pre-specified thresholds. Ramraj Pai, president, CRISIL, said: "It will limit investor appetite for such instruments and will also reduce their attractiveness for banks, as these instruments will be costlier than those under Basel-II."
A holding company structure will be helpful in raising investor confidence in non-equity instruments, he said.
The rating agency says the depth of investment in such instruments can be expanded by measures such as allowing insurance provident funds to invest in bond markets.
CRISIL has made its estimates keeping in mind an 18 per cent yearly growth of the banking sector for the next five years.
Earlier, C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, had also said the required non-equity capital might be difficult to achieve.
Of the Rs 2.7 lakh crore estimated by CRISIL, Rs 2.1 lakh crore will be required to be raised by public sector banks and the rest by private banks. In the case of public sector banks, the share of equity capital would be Rs 90,000 crore and Rs 1.2 lakh crore would be non-equity. Private banks need to raise Rs 40,000 crore of equity capital and Rs 20,000 crore of non-equity.