Indian lenders may have to raise as much as $50 billion to add to their retained earnings to meet Basel III capital requirements being set by the country’s central bank, Fitch ratings said today.
More than 75 percent of the funds will be required during the two years starting April 1, 2016, under new capital guidelines issued by Reserve Bank of India on May 2, Fitch said in a statement. Banks must be fully compliant with the new rules by March 2019, according to the central bank.
Indian banks need to raise fresh funds at a time when their financial performance is being pressured by slowing economic growth and bad loans. State Bank of India, the nation’s largest, will be most affected by the higher capital requirements given its share of the country’s banking system, followed by smaller government banks that are less able to raise funds, Fitch senior director Ananda Bhoumik said in the statement.
“The immediate impact of the Basel III capital regime is benign,” she said, citing a common equity Tier 1 ratio for many Indian banks close to 8 percent or higher.
Large private banks are likely to have less trouble meeting the new rules, helped by stronger profits and higher capital ratios, according to Fitch. About half of the $40 billion needed by government banks is likely to be injected by the government to maintain majority shareholding, the rating company said.
“We are not expecting any immediate difficulty for Indian banks in raising capital to comply with Basel norms,” M D Mallya, who heads the Indian Banks Association, said in an interview today ahead of the Fitch report. “Indian lenders are better capitalized than many of their global peers and can comply with the new norms with relative ease.” He is also the chairman of Bank of Baroda.
India’s sovereign credit outlook was lowered last month to negative by Standard & Poor’s, and is rated one step above junk status. Fitch has an equivalent rating on the country’s debt with a stable outlook.