In a breather that most banks will welcome, RBI has pushed back the deadline for complying with Basel-III guidelines by a year. Essentially, the counter-cyclical provisions will be introduced from FY16 rather than from FY15 so that they will hit 2.5% in FY19 rather than in FY18 as earlier scheduled. Consequently, the minimum total capital plus the counter-cyclical buffer will hit 11.5% in FY19 rather than in FY18. For the moment, most Indian banks are fairly comfortably placed with regard to their capital requirements save a few which are critically short—United Bank of India, for instance, had a Tier I ratio of 5.6% at the end of December, 2013, and Central Bank of India had a Tier I ratio of 7%.
However, given that the economic environment remains sluggish and that cash flows of hundreds of companies are likely to remain strained for some time, banks are clearly going to have to set aside more by way of provisions for impaired assets even after the large sums they have provided over the last year. The RBI estimates public sector banks could end up with gross NPAs—in a baseline scenario—of 4.9% by March 2015. The situation could turn out to be a lot worse since, at the end of December, 2013, gross NPAs for public sector lenders was estimated at 4.7%. The bigger problem is that banks haven’t covered themselves adequately for much of the toxic loans—Credit Suisse believes state-owned lenders have seriously under-
provisioned for impaired assets and that the extent of under-provisioning is greater than 100% of book value for nearly half the banking sector. For the coverage to be upped to 70%, it would require some $45 billion (R2.7 lakh crore) of capital.
The provisioning for toxic loans apart, banks need R1.4-1.5 lakh crore of common equity to be fully compliant with Basel-III. Given the state of its finances, the government will be hard-pressed to help capitalise the PSU banks—it has said it will infuse just R11,200 crore in FY15 on the back of R14,000 crore in FY14. Unless the government is willing to dilute its stake, these banks can’t even mop up money from the capital markets beyond a point; even otherwise, given the relatively unexciting earnings potential, banks will not get a good price for their stock.