Dubai: India’s banking sector is expected to face huge challenges in meeting the globally mandatory Basel III banking norms by March 31, 2019, according to a recent study by the Association of Chambers of Commerce (ASSOCHAM) India and the National Institute of Bank Management (NIBM).
Given the credit growth expected in the short to medium short, the capital requirement of the Indian banks would cross Rs5 trillion (about $77.4 billion) according to the ASSOCHAM-NIBM study.
The study said banks in the public sector will find it very challenging to meet the Basel III requirements as the majority of the funds need to be inducted by the Government of India, as it owns majority stakes in them.
With the assumption of at least 20 per cent credit growth in the short- to medium-term, core equity needs are likely to be about $25 billion (Dh91.78 billion) while non-equity requirements through Tier-I and Tier II bonds are set to be about $55 billion.
The study estimates that the public sector banks alone will require close to $20 billion to boost their capital to meet the Basel III requirements.
Given the dismal performance shown by majority of the public sector banks in recent years, the study says that it will be difficult for them to raise the capital to this magnitude from the market.
Similarly, raising non-equity capital through Tier-I and Tier II bonds will be a huge challenge for both by the government and private banks, as the markets for Tier-I and Tier II bonds are very limited, the ASSOCHAM-NIBM study, authored by several leading bankers and academicians, said.
While some of the major banks in India may resort to global markets, that route would push up the cost of capital significantly and thus add more stress on their profitability.
Thus the key challenge for most Indian banks between now and the Basel III deadline in 1919 is to adopt a model that will fortify the sector while not impairing its efficiency and profitability.
In order to achieve this, ASSOCHAM president Rana Kapoor said a supportive capital markets environment and depth in the corporate bonds market was needed.
While even Basel II could not prevent the global sub-prime mortgage crises and collapse of Lehman Brothers, the next level of Basel III is an initiative for internationally-coordinated regulatory change that is designed to offer a response to some of the inadequacies of the regulatory framework as it stood before the financial crisis of 2007-2011.
In India, the RBI has set a deadline of March 31, 2019 for implementation of these norms even as the banks are battling the challenges of NPAs and volatile capital markets.
