Basel III norms, which will come into effect this April, are likely to increase pressure on Indian banks to raise capital and can lead to some changes in the banking industry, according to Standard & Poor’s (S&P).
In its ratings services report published on Monday, S&P said Indian banks may need a whopping Rs 2.5 trillion additional capital by 2018 in order to comply with the proposed Basel III norms.
“We estimate that Indian banks will require a minimum additional capital of about Rs 691 billion to meet the RBI’s 8% requirement for the common equity (Tier I) and capital conservation buffer ratio,” S&P said.
Besides, the banks may need an additional capital of Rs 2.5 trillion, given a tendency for them to hold higher-than-minimum capital and the limited market for hybrid instruments in India.
According to S&P, banks face a constant need to replenish capital at regular intervals to support their high growth and starting April, following the implementation of Basel III norms, Indian banks will find that their capital requirements are increasing in phases.
“The biggest challenge for the Indian banking sector is the state of Indian public finances,” said Deepali Seth, Credit Analyst, S&P India. She added that the government’s large fiscal deficit will limit its ability to inject capital into government-owned banks, which currently have less capital adequacy than the private and foreign banks operating in India.
However, S&P said, smaller banks may face difficulties to comply with the proposed capital requirement norms and the extent of the challenge may vary from bank to bank. “As banks simultaneously tap the capital market, some may struggle to raise the necessary capital. A few of the smaller banks could become potential takeover targets, which could result in consolidation,” said Seth.