Welcoming RBI’s decision to extend implementation of Basel III capital norms by a year, rating agencies have said that lenders particularly state-owned ones, which are facing capital pressure, will get additional time to meet the minimum capital norms.
“The main benefit from the one-year moratorium will be the delay in the phase in of the capital conservation buffer from March 2016, instead of FY'15, as most other parameters remain the same,” rating agency Fitch said in a report.
RBI last week extended the transitional period for implementation of the stringent Basel III capital norms by a year to March 2019, as most of the banks are facing stress on account of weak asset quality.
Fitch further said the move will help banks to get some crucial breathing space from the lower 5.5 per cent pre-specified capital trigger on additional tier 1 securities until FY’19 when it reverts to 6.125 per cent.
According to Icra, PSBs’ tier I capital requirement to meet growth and to meet Basel III norms would increase to Rs 3.9 - 4.2 trillion from Rs 3.3 - 3.6 trillion due to longer transition period.
The report said earlier public sector banks’ needed common equity tier I capital of Rs 2 - 2.2 trillion and additional tier I capital of Rs 1.3 - 1.4 trillion during FY’15-18, but as per revised schedule this would be marginally higher at Rs 2.5 - 2.7 trillion and Rs 1.4 - 1.5 trillion respectively during FY’15-FY’19.
“The extension provides short-term breather whereby PSBs’ tier I capital requirement for FY’15 reduces to less than Rs 15,000 crore as against earlier requirement of Rs 20,000- 45,000 crore, against which the government has budgeted Rs 11,000 crore.
Another rating agency, Crisil said that though extension of Basel III capital regulations deadline will have positive implications for banks’ total capital requirements, it will increase the risks in the banks’ tier I capital instruments, and will lead to higher cost for banks.
The report further said the first risk relates to the higher risk of coupon non-payment for investors arising from the stipulations that banks can pay coupon only out of current year’s profits, and that the coupon payout be capped at 40 per cent of a bank’s total distributable surplus for the year.
The second risk is the increase in potential loss of principal due to the provision that disallows banks to opt for temporary write-down in the event of breach of pre-specified trigger.”
“Given both these additional risks, investors will seek higher coupon on banks’ non-equity Tier I instruments.
This will make it costlier for banks to raise such instruments,” Crisil director Rajat Bahl said.
ICRA said as there is no relief on overall capital requirement on full implementation of the Basel III norms, capital would remain a big challenge for PSBs; their tier I capital requirement for Basel III and for growth during FY’15-FY’19 remains relatively large at 120-135 per cent of their current market capitalisation.
The Reserve Bank has also provided additional clarity on Basel III capital instruments and their behaviour, particularly on the issue of loss absorbency.
The RBI removed option of temporary write-down feature and accordingly banks are allowed to issue non—equity capital instruments with conversion or permanent write-down feature.
“The exclusion of temporary write-downs on Basel III capital instruments reinforces the regulator’s intent to ensure capital securities act like equity when required under stress,” Fitch said.
Fitch added from a ratings perspective, with permanent write-off now a standard feature across Basel III regulatory capital instruments, it is likely that tier II subordinated debt will be notched twice from the relevant anchor rating because recovery prospects would be poor under a permanent and full write-down scenario.